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Abstract:
While macroeconometricians continue to dispute the size, timing, and even the
existence of effects of monetary policy, political economists often find large
effects of political variables and often attribute the effects to manipulation
of the Fed. Since the political econometricians often use smaller information
sets and less elaborate approaches to identification than do
macroeconometricians, their striking results could be the result of
simultaneity and omitted variable biases. Alternatively, political whims may
provide the instrument for exogenous policy changes that has been the Grail of
the policy identification literature. In this paper, we lay out and apply a
framework for distinguishing these possibilities. We find almost no support for
the hypothesis that political effects on the macroeconomy operate through
monetary policy and only weak evidence that political effects are significant
at all.
Full paper (720 KB PDF)
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