DP18612 Estimating the Effects of Political Pressure on the Fed: A Narrative Approach with New Data
This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political pressure, I develop a narrative identification strategy based on President Nixon’s pressure on Fed Chair Burns. I exploit this narrative through restrictions on a structural vector autoregression that includes the personal interaction data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, by having a stronger effect on
inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, for six months, raises the price level more than 8%.While the role of central bank independence has previously been studied using cross-country data, my estimates cover one economy through time and are quantitative: increasing political
pressure by half as much as Nixon, for six months, raises the U.S. price level by more than 8%.