Saturday, May 12, 2012

There Is No Technocracy: Partisan Bias at the Fed

. Saturday, May 12, 2012

These are a few months old now, but Christopher Gandrud -- a recent LSE PhD -- has a cool project going. It's spread out over several posts [1, 2, 3] but here's the gist:

So, I have two questions:

1. Have Fed inflation forecast errors been different during Democratic and Republican presidencies?
2. Are Fed inflation forecast errors different for election periods and non-election periods? ...
Question 1: The Fed did tend to overestimate inflation during Democratic presidencies and underestimate it during Republican presidencies (an Error/Actual score of 0 means that the forecasters perfectly predicted actual inflation). Admittedly we have a pretty small sample of Democratic presidencies (only Carter and Clinton), but it is striking how all of the big underestimates were during Republican presidencies and almost all of the big overestimates were when Democrats had power.

Maybe, Federal Reserve staff anticipate--to an incorrect degree--that Democratic presidents will pursue expansionary policies and vice versa.

Question 2: It is not as clear that forecasts systematically differ in election periods as opposed to non-election periods. Though the spread of the errors across parties does shrink very close to the election. I wonder why this might be?

The partisan effect is less obvious than in the earlier graph, but is is clear that during this time period the big over estimations are during Democratic presidencies and the big (actually almost all) underestimations are during Republican ones. The effect would be even stronger if we took out the end of Reagan's first term and his second one, where Fed staff may not have fully adjusted their forecasting to reflect the Volker-Greenspan era of moderate inflation.


There Is No Technocracy: Partisan Bias at the Fed




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