whom can we trust to run the fed theoretical support for the founders views abstract the federal reserve has been called a bizarre policymaking structure this paper documents and formalizes a historical argument that the fed s structure was a response to public conflict over inflation s redistributive powers the paper shows that in the face of conflict over redistributive inflation policy by majority can lead to policy that is worse even for the majority than obvious alternatives in balancing the interests for and against surprise inflation the fed s structure can lead to a better outcome

regional house price dynamics and voting behavior in the fomc i introduction interest rate decisions by the federal open market committee fomc are not always made unanimously different individual views about the appropriate monetary policy stance may lead to the result that members cast dissenting interest rate votes in fomc meetings that is they opt for a higher or lower interest rate than proposed by the chairman of the fomc several studies find that fomc members have different views about the appropriate monetary policy when casting interest rate votes belden 1989 chappell and mcgregor 2000 chappell mcgregor and vermilyea 2005 2008 2012 gildea 1990 1992 havrilesky and gildea 1991 1995 havrilesky and schweitzer 1990 meade and sheets 2005 meade 2010 tootell 1991 1996 an important source of such dissenting votes may be the regional bias of the fomc member which is constituted by its regional affiliation several studies have examined the impact of the regional unemployment rate on the interest rate votes of fomc members while gildea 1992 meade and sheets 2005 and chappell mcgregor and vermilyea 2008 find that a higher regional unemployment rate relative to the national rate increases decreases fomc members preference for monetary easing tightening tootell 1991 finds no significant evidence 1 in this article we analyze whether fomc members align their interest rate voting behavior with house price developments of the federal reserve district they represent in addition to the regional unemployment rate studied so far in this way we can test whether regional house prices and or regional unemployment rates have a significant impact on the voting behavior of fomc members and we examine whether there are systematic differences between regional bank presidents and board members various studies have examined the link between monetary policy and asset price developments according to gilchrist and leahy 2002 there are some good reasons why central banks should align their monetary policies with asset prices first the consumer price index cpi or gross domestic product gdp deflator are incomplete measures since they only signal information on the prices of goods consumed today whereas a more complete measure would also signal future cost of living such as the information contained in asset prices alchian and klein 1973 second asset prices may be useful in forecasting inflation goodhart and hofmann 2000 third asset prices may directly affect real economic activity and inflation since for example wealthier consumers spend more which may affect price developments carroll otsuka and slacalek 2011 whether central banks should react to asset prices is however debated in the literature the traditional view is that central banks should only react to asset prices to the extent that they feed back into the conventional monetary policy goals inflation and output bernanke and gertler 1999 2001 on the contrary cecchetti et al 2000 conclude that it may be reasonable for central banks to react to asset prices in particular house prices in order to avoid the buildup of asset price bubbles as the burst of asset price bubbles may lead to financial crises reinhart and rogoff 2009 leaning against the buildup of extreme asset price changes may therefore be a reasonable choice for central banks as a part of their mission to manage systemic risk allen and carletti 2009 bordo and jeanne 2002 another rationale that central banks should take asset prices particularly house prices into account is that house prices have been shown to be suitable early warning indicators for the outbreak of the recent financial crisis kemme and roy 2012 several empirical papers analyze the impact of asset prices on interest rate setting rigobon and sack 2003 and dupor and conley 2004 find evidence that fomc interest rate decisions are influenced by equity prices on the contrary fuhrer and tootell 2008 find that fomc interest rate decisions are not a direct response to equity price movements and are an indirect response only to the extent that equity prices helped forecast the conventional monetary policy goals

does a good central banker make a difference the personalities of central bankers moved center stage during the recent financial crisis indeed several central bankers even became superstars in this article we investigate whether superstar central bankers have an impact on economic performance we employ school grades given to central bankers by the financial press defining as superstars those central bankers receiving the top grade first we explain the grades in a probit estimation with measures of economic performance institutional features and personal characteristics second we employ a matching approach to account for the endogeneity of grading with respect to economic performance using entropy balancing we identify credible counterfactuals for top graded central bankers that is nonsuperstar central bankers who face similar situations comparing the economic performance of both groups we find that superstars do indeed matter a top graded central banker faces a significantly more favorable output inflation tradeoff than his peers this effect is driven by outstanding central bankers in both advanced and emerging economies and is especially prevalent in the precrisis subsample jel e52 e58

government policy and the firm s capital structure abstract the purpose of this paper is to examine the effects of commonly observed forms of government intervention on the firm s capital structure we show that since market claims against the firm are always properly priced the firm is forced to take market claimants interests into account on the other hand since government claims are usually not adjusted for risk the firm can take advantage of the government it does so by choosing strategies that extract maximum value minimum cost from these policies in particular the firm uses its capital capital structure to maximize the value of the policy thus leading to a determinate capital strucure

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

money politics and the post war business cycle abstract the political economy literature has enshrined as stylized fact the view that lower inflation and temporarily lower growth follow the election of republican presidents and has emphasized political manipulation of monetary policy as an explanation support for the monetary explanation comes in econometric work that largely ignores identification issues that dominate the literature on measuring the effects of monetary policy we generalize a standard vector autoregression framework to accommodate discrete political party variables we find almost no support for the view that political effects on the macroeconomy operate through monetary policy and only weak evidence that political effects are significant at all

a comparison of the dynamics of industrial clustering in computing and biotechnology abstract this paper compares the dynamics of the process by which industrial clusters emerged in the us computing and biotechnology industries it examines whether new companies are attracted by industry strength in particular sectors or by the strength of the science base at particular locations in biotechnology it also compares the growth of incumbent firms in the two industries and asks whether growth is boosted by being within a cluster the paper finds that within computing there are some important cross sectoral effects on entry while in biotechnology these cross sectoral effects are more limited in biotechnology the science base plays an important role in promoting entry the growth of incumbent firms in both industries is promoted by strength in the company s own sector and cross sectoral effects and the role of the science base are negligible

the biases of federal reserve bank presidents this paper develops statistical tests which show that in federal open market committee voting federal reserve bank presidents as a group prefer less expansionary monetary policy than federal reserve board members further tests show that a subset of federal reserve bank presidents vote in a manner which is consistent with the partisanship of the u s president during whose term they were appointed membership in this subset is highly correlated with a career as an economist these results have implications for reforms which would alter the voting power of bank presidents on the fomc

a long history of fomc voting behavior we devise and apply a method for estimating monetary policy reaction functions for individual members of the federal open market committee fomc of the federal reserve our method uses members votes on the monetary policy directive in fomc meetings as the key source of data on individual preferences the analysis provides a ranking by preference for ease for 84 fomc members who served during the 1966 1996 period

the objectives and priorities of monetary policy under different federal reserve chairmen this paper utilizes a monetary policy reaction function that relates policy intentions to forecasts of policy objectives estimates of this reaction function over the post accord period suggest that the burns period was unique while the martin and volcker periods were extremely similar the burns period was structurally distinct from both the martin and volcker periods further model specifications that allow for an independent influence on monetary policy from different presidential administrations also imply that there are significant differences in monetary policy under different fed chairmen copyright 1990 by ohio state university press

monetary policy theory and practice in respect of the theory of monetary policy i am reminded of the comment that jacob viner made many years ago at a meeting of the american economic association about alfred marshall s economics what is new is highly unlikely at this late date also to be true and significant 1 consequently i shall restrict my remarks on theory to trying to summarize what i regard as the present intellectual position

bankruptcy warranties and the firm s capital structure this paper examines the role of capital structure as an instrument for shifting risk between real and financial markets the author considers a firm whose contractual agreements involve both consumers and debtholders and shows that if consumers are risk averse whereas equity and debtholders are risk neutral the firm uses its capital structure to shift risk away from consumers the optimal allocation of risk across real and financial markets leads the firm to be fully equity financed copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the influence of the federal advisory council on monetary policy the federal advisory council consists of twelve bankers elected by federal reserve bank directorates who advise the federal open market committee every three months on their desired direction for monetary policy this paper tests the conjecture that the council s directives to the committee contain information that predicts subsequent changes in interest rates and committee directives regression equations and granger causality tests do not disprove the conjecture this is the first hard evidence of private interest group influence on monetary policy copyright 1990 by ohio state university press

money capital in the theory of the firm a preliminary analysis preface part i theoretical issues and analytic motivation 1 the firm in a monetary economy 2 assets capital and capitalization 3 the concept and relevance of economic value part ii the neoclassical tradition 4 production pricing investment and financing interdependence in the firm 5 probability risk and economic decisions 6 utility uncertainty and the theory of choice 7 financial asset markets and the cost of money capital 8 the cost of money capital further analysis and controversy 9 the investment expenditure project part iii postclassical perspectives 10 neoclassicism and an alternative perspective 11 production and the place of money capital 12 uncertainty and decisions in the firm references index

the political economy of the tariff cycle how can protectionism and free trade succeed one another our answer focuses on the changing balance of private actors political demands these actors acquire interests in tariff policies because their assets are spatially concentrated and trade in these assets is subject to various limitations actors in regions experiencing no new investment in an established industry old regions have interests that sometimes differ from those in regions where there is new investment we show that old regions have no reason to be involved in tariff politics at business cycle peaks during troughs whether a state becomes more or less protectionist depends ceteris paribus on the relative political strength of old import competing and old exporting interests if old import competing industries outweigh the old exporters then protection will tend to increase at the trough and decrease at the peak of a business cycle the opposite result occurs when old exporters are more influential

introduction funding gaps theoretical and empirical foundations of government policies to plug alleged business funding gaps are highly controversial but rarely subject to wide ranging in depth debate this symposium from major scholars in the field provides a counterbalance topics addressed cover the theory of lending under asymmetric information its implications for overlending relationship lending as a market solution to information asymmetries government emulation of private sector decision making to eliminate underprovision of high tech equity and theoretically based empirical work testing for funding deficiencies in the high tech sector despite the very different and potentially contradictory contributions the result is surprisingly a set of mutually agreed policy conclusions

the regional representation of federal reserve bank presidents recent litigation has questioned the constitutionality of having federal reserve bank presidents serve on the federal open market committee inherent but undocumented in these lawsuits is the belief that district bank presidents vote differently than federal reserve governors at federal open market committee meetings this paper analyzes the voting behavior of federal reserve bank presidents and uncovers a regional bias in their monetary policy preferences presidents representing regions with higher unemployment rates or with larger percentages of democratic voters tend to vote for more expansionary monetary policy this study provides yet another clue to the monetary policymaking behavior of federal reserve officials copyright 1992 by ohio state university press

regional influences on fomc voting patterns this paper looks at the monetary policy decisions of the u s federal reserve and asks whether observed voting patterns have been driven entirely by national concerns or whether regional factors have also played a role we find that fed policymakers take into account developments in regional unemployment when casting votes on monetary policy these results are robust to different specifications of the voting equation this research is relevant for the fed and it may also be relevant for europe s fledgling central bank in frankfurt in light of regional differences within the euro area

the educational and professional background of central bankers and its effect on inflation an empirical analysis we assume that central banks can control inflation so that inflation rates reflect the preferences of the central bank council the hypothesis to be tested is that these preferences depend on the central bankers educational and or professional background in a panel data analysis for the euro area and eleven countries since 1973 we explain inflation either by the weights with which the educational and professional characteristics of the 391 council members were represented in the various central bank councils or by the education or profession of the median council members control variables are added using professional background weights we find that former members of the central bank staff and in some specifications former insurance executives commercial bankers other businessmen and public servants prefer significantly lower inflation rates than former union leaders and politicians do in the median voter analysis former central bankers commercial bankers businessmen and public servants are also significantly more inflation averse than economic scholars as for the education of the council members our results are less robust however if the median member of the central bank council has studied business the inflation rate is significantly lower than if she has studied economics taking educational and professional background together central banks seem to attract or produce primarily economists who are monetary conservatives whereas keynesian economists are more prominent in academia jel classification e42 e58

the determinants of tenure on the federal reserve board of governors should i stay or should i go this paper examines the quit behaviour of members of the federal reserve board of governors we find that the probability of a member continuing is lower when the member is an economist when the member comes to the board from the private sector and when their policy views differ from the board as a whole in addition we find evidence that the president can exert influence on the fed by the power of appointment and in contrast with what one might expect we find that salaries on the board relative to the private sector do not seem to be an important factor in determining the decision to continue service on the board

the policy preferences of fomc members as revealed by dissenting votes comment the purposes of this comment are to present evidence that casts doubt on several of the conclusions of susan belden s recent paper in this journal 1989 and to suggest directions for future research in this area to begin there is skepticism that dissenting votes at least as belden measures them can be unbiased indicators of policy preferences in addition belden partially recognizes but does not fully specify three influences on federal open market gommittee fomc member voting that are prominently featured in the literature these influences are 1 fomc member training background and career experience 2 state of the economy measures and 3 partisanship measures each of these factors alone may help to explain one of belden s three major findings first the training backgrounds and career experiences of bank presidents may help to explain belden s affirmation of their penchant to dissent from fomc directives on the side of monetary tightness second the state of the economy may help to explain belden s finding of a decline in dissent voting when arthur burns was chairman of the federal reserve third differences between the party of the president and the partisan composition of the board of governors may help to explain belden s discovery of shifts in ease and tightness dissent voting behavior under different chairmen since this comment will indicate how these influences qualify belden s elndings it will at the same time suggest fruitful directions for the research agenda in this area

reliable and unreliable partisan appointees to the board of governors every new appointment to the board of governors in recent years has triggered speculation as to how the new governor will vote in fomc meetings while several studies have hinted at partisan voting behavior by governors no study has yet attempted to identify reliable and unreliable partisan voting behavior and to pinpoint the background characteristics of governors that distinguish between the two this paper indicates that board members with a background in economics consistently voted in line with the economic ideology of the appointing president noneconomists on the board however displayed no such partisan voting behavior and were seen to be influenced by pressures emanating from the administration and by the monetary environment prior to their appointment over the 1951 to 1987 period most presidents have appointed reliable governors earlier in their presidential terms when the returns from being able to influence subsequent monetary policy are great and have chosen unreliable governors later in their terms when election support from the interest groups that these unreliables represent is important the results of the present paper suggest skepticism toward the recent spate of rational expectations game theoretic models which feature a dictatorial policy maker gaming atomistic market participants whose only political activity voting generates monetary surprises followed by convergence to an equilibrium because of their obsession with the ceremonial formalism of their genre these models ignore a vast complementary literature and as a consequence display conspicuously flimsy institutional and historical premises instead the present paper argues for the greater relevance of models of uncoordinated interaction between multiple political and private principals and federal reserve agents

political parties and the business cycle in the united states 1948 1984 this paper tests the existence and the extent of a politically induced business cycle in the u s in the post world war ii period the cycle described in this paper is different from the traditional political business cycle of nordhaus it is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts from an explicit optimization problem we derive a system of equations for output and money growth then we successfully test the non linear restriction imposed by the theory on the parameters of the system of equations we cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations

monetary policy preferences of individual fomc members a content analysis of the memoranda of discussion the memoranda of discussion provide detailed records of federal open market committee fomc meeting deliberations procedures are developed for coding the textual data in the memoranda and assessing the reliability of those codings the codings are then used in the estimation of parameters of individual fomc members reaction functions data from the 1970 to 1976 period are employed in the estimation in the future similar methods could be used to analyze newly released transcripts of fomc meetings held after 1976

private equity investment decisions in family firms the role of human resources and agency costs abstract this study examines decision making criteria that are employed by private equity pe investors selecting family firms hypotheses test the likelihood of investment based on family firm characteristics findings show that pe professionals take into account family specific criteria including human resources and opportunities to reduce agency costs furthermore pe professionals prefer family firms that are already professionalized this research contributes to the family firm literature on both a theoretical and a methodological level exploring nonfamily succession routes and employing techniques conjoint analysis for data collection and multilevel models for data analysis that have seldom been used in this context

agent heterogeneity and consensual decision making on the federal open market committee the consensual aspects of decision making are essential for understanding policy made by administrative organizations that take the form of a commision or board consensual decision making reflects the degree of policy cohesion exhibited by high level officials within administrative organizations it is proposed here that this type of behavior may differ between heterogeneous agents the federal open market committee fomc of the federal reserve system serves as a salient setting for testing these propositions in a time series context the empirical results indicate that major intra institutional differences exist between board of governor bog and regional bank president rbp members of the federal open market committee fomc regarding consensual behavior in terms of policy decision making the econometric evidence clearly demonstrates that the consensual behavior of these agents are fundamentally different from one another this in turn has important implications for the study of other commission and board policy making bodies that consist of agents who are not all homogeneous

trajectories of small business financial structure a dynamic theory of the small firm is expounded assuming entrepreneurs maximise business value over a finite time horizon predicted trajectories for key financial variables are seen to depend on whether debt or equity are cheaper the predicted trajectories are compared with actual trajectories using empirical evidence from three years of detailed primary source data on one hundred and fifty new business startups in scotland evidence largely confirms predictions of the model for the cheap equity case for this case as capital and sales rise steadily debt is retired rapidly except when interest rates on long term debt are low this finding is supported by explicit empirical trajectories of key financial variables

monetary policy signaling from the administration to the federal reserve this chapter employs the index of monetary policy signaling from the administration to the federal reserve safer that was developed in chapter two the safer index is a simple weekly sum of articles that appeared in the wall street journal in which administration officials expressed a desire for easier 1 or tighter 1 monetary policy a key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and federal reserve officials 1 the signaling index is employed in ordinary least squares regressions for the period from january 1964 to november 1991 cumulative values of the safer index over a three week period as an explanatory variable are found to have a statistically significant effect on the average federal funds rate during the third week as the dependent variable further evidence suggests that the safer index is granger causal with respect to the federal funds rate after classifying the signals by sources within the administration oval office council of economic advisers treasury and other and unidentified sources it is shown that for the overall 1964 1991 period signals from the treasury department and from other and unidentified sources have a statistically significant effect on the federal funds rate while signals from the oval office and the council do not when the data are segmented according to who was the chairman of the federal reserve board at the time ordinary least squares results indicate that the federal reserve did not systematically respond to executive branch signaling in a statistically significant way when william mcchesney martin g william miller and alan greenspan were chairmen but did respond statistically significantly to administration signaling during portions of the periods during which arthur burns and paul volcker were chairmen

the effect of fomc votes on financial markets this paper shows that since votes of members of the federal open market committee have been included in press statements stock prices increase after the announcement when votes are unanimous but f

a multinominal logit analysis of the influence of policy variables and board experience on fomc voting behavior previous studies have used probit or logit models to analyze two states of monetary policy tighter or looser in this paper we employ multinominal logit to permit federal reserve monetary policy to assume one of three alternative states tighter looser or no change as a function of three independent economic variables unemployment real growth and inflation and the amount of experience of the board of governors the results indicate that the federal reserve reacted differently under burns miller and volcker and between volcker s two operating procedures in the formulation of monetary policy

analytical issues in external financing alternatives for sbes as the amount of information about an enterprise is generally not neutral with respect to firm size financiers have problems to identify the default risk associated with a borrower or to have control over a borrower s investments this review paper analyses how various control mechanisms are fit to reduce this information problem and how various types of capital suppliers are endowed to finance small business enterprises

partisan monetary policies presidential influence through the power of appointment we investigate the channels through which partisan influence from a presidential administration could affect monetary policy making influence could be a result of direct presidential pressure exerted on members of the federal open market committee fomc or it could be a result of partisan considerations in presidential appointments to the board of governors to investigate these two channels of influence we devise and apply a method for estimating parameters of monetary policy reaction functions that can vary across individual members of the fomc our results suggest that the appointments process is the primary mechanism by which partisan differences in monetary policies arise

financial structure and the growing small firm theoretical underpinning and current evidence this paper introduces a special issue of small business economics on financing and small firm dynamics it establishes a general underpinning for the analysis of small firm financing over time this appeals to the control theoretic literature and permits the specification of master trajectories of key variables over time like output debt dividend and capital two trajectories for cheap debt and cheap equity respectively illustrate this type of analysis showing how financial structure can vary over time involving phases of growth consolidation and stationarity from this perspective six papers on small firm dynamics and finance are reviewed issues addressed include credit constraints funding shortages wealth as collateral financial structure target income modelling of start up and bank lending during financial liberalisation

regional banking instability and fomc voting abstract this study analyzes if regionally affiliated federal open market committee fomc members take their districts regional banking sector instability into account when they vote considering the period 1979 2010 we find that a deterioration in a district s bank health increases the probability that this district s representative in the fomc votes to ease interest rates according to member specific characteristics the effect of regional banking sector instability on fomc voting behavior is most pronounced for bank presidents as opposed to governors and fomc members who have career backgrounds in the financial industry or who represent a district with a large banking sector

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

central bank behavior a positive empirical analysis abstract the central bank is analyzed as a utility maximizing unit acting in the framework of a politico economic model it derives utility from keeping the price level stable and is constrained by government the structure of the economy and the political commitment to stable exchange rates it uses a satisficing strategy concentrating on keeping conflicts with government below a certain level in the case of serious conflict the central bank follows the policy directions undertaken by government but with a time lag the complete model comprising endogenous consumer voters government and central bank is econometrically tested for germany with good results

majority rule consensus building and the power of the chairman arthur burns and the fomc this paper investigates decision making within the federal open market committee of the federal reserve focusing on the competing pressures of majority rule consensus building and the power of the chairman to undertake this analysis we have constructed an original data set recording desired federal funds rates for each member of the committee over the 1970 78 period our results confirm a disproportionate influence of the chairman in the policy process they also confirm that other voting members of the committee have an impact on policy choices estimates indicate that the chairman exercises 40 to 50 of the voting weight in committee decisions

federal open market committee structure and decisions abstract this paper examines the dissents of federal open market committee members regarding the domestic monetary policy directive it shows that on balance governors appointed by democratic u s presidents dissented significantly on the easier side while governors appointed by republican u s presidents dissented significantly on the tighter side the pattern of dissents for the reserve bank presidents was like that of republican appointees to the board of governors the bank presidents voting did not reflect regional points of view furthermore the timing of the dissents by both the governors and presidents did not seem to be associated with the onset of congressional or presidential elections

policy preferences of fomc members as revealed by dissenting votes the composition of the federal open market committee the ability to predict the effect of policy decisions on economic and f1nancialvariables and political influence from the white house and the congress are all potentially significant determinants of monetary policy decisions this study uses the record of dissenting votes from federal open market committee meetings to consider the relevance of these influences tests for differences between voting patterns of bank presidents versus members of the board of governors and differences during various historical periods provide insight into four questions 1 are the policy preferences of bank presidents different from those of the members of the board 2 does uncertainty about the economic and financial results of policy actions influence the level of dissent 3 is there a difference in the pattern of dissent under different chairmen and 4 is there effective political influence on monetary policymakers the legitimacy of district bank presidents serving on the fomc has been challenged in the courts and the legislature challengers fear that district bank presidents who serve without executive or legislative approval prefer policy that produces lower inflation and higher unemployment relative to the policy preferred by members of the board who are appointed by the president and confirmed by the senate rogoff 1985 argues that in the presence of market distortions it is better for society to have central bankers who attach a larger weight than the society s

appointment procedures and fomc voting behavior an important issue for the conduct of monetary policy in the united states is whether the various appointment procedures of members of the federal open market committee help determine their voting behavior it is usually asserted that the method by which district bank presidents are appointed leads to more independence and or more conservative behavior increased independence is generally believed to reduce suboptimal short run manipulation of monetary policy but at the cost of reducing the central bank s accountability to the country s short run and longrun objectives the social desirability of any potential differences in monetary policy resulting from these appointment procedures and the optimality of discretionary policy in general are not addressed in this paper however instead the effect on monetary policy of the different appointment procedures currently in place within the federal reserve system is examined does the increased independence that the district bank presidents supposedly possess produce significantly different monetary policy from that of the politically appointed board governors many studies have examined the effects various appointment procedures may have on voting at the fomc and the results have been somewhat mixed belden 2 chappell havrilesky and mcgregor 3 havrilesky and gildea 6 and puckett 8 find that bank presidents tend to vote for tighter policy than board governors while tootell 10 finds no differences between the two groups most of the literature has concluded that in some unclearly defined way and for no clear theoretical reason the more independent district presidents are more conservative than the board governors in this paper conservative is defined over several clear dimensions in order to test whether district presidents vote more conservatively than board governors some slight variation in the voting behavior of bank presidents and board governors is found but the causes of any dissimilarities are shown to be much different from those asserted in the earlier literature

the federal reserve s response to aggregate demand and aggregate supply shocks evidence of a partisan political cycle the orthodox approach to modeling the fed s response to economic conditions is to employ a monetary policy reaction function most reaction functions are estimated by regressing a policy indicator possibly the federal funds rate or a monetary aggregate on variables that describe the state of the economy such as unemployment inflation and growth in output under certain conditions which we discuss below estimated coefficients from a reaction function provide information about the fed s monetary policy priorities moreover extending the model to include election and partisan dummy variables may provide information about the fed s response to political pressures there are two problems with interpreting the coefficients in a standard reaction function as the weights that the fed attaches to its policy objectives first the monetary policy decision may not be represented accurately by an aggregate reaction function one that models the fed as a whole because there are twelve voting members on the fomc chappell havrilesky and mcgregor 10 have recently addressed this issue by employing a disaggregated set of reaction functions the second problem with interpreting reaction function coefficients as the weights the fed places on its policy objectives is that this interpretation implicitly assumes structural stability of the underlying macroeconomy abrams froyen and waud 1 31 acknowledge this shortcoming when they state coefficients from estimated reaction functions do not provide direct information on policymaker utility functions rather than being the solution to an unconstrained optimization dependent only on policymaker preferences reaction functions are the output of a constrained maximization where the constraints are the reduced form equations that characterize