Election cycles in Federal Reserve policy instruments and indicators

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1986

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Virginia Polytechnic Institute and State University

Abstract

This study analyzes the empirical evidence of a political monetary cycle in Federal Reserve policy instruments and indicators, such as the discount rate and the monetary base. The theoretical predictions of a four year presidential election cycle are tested with seasonal adjustment indices, which provide a measure of the seasonal component of these time series.

It was found that Democratic presidential terms are characterized by a six month stimulation of borrowing, engineered through a reduced discount rate in the election year.

The pre-election stimulation in Republican presidential terms begins in the pre-election year. This allows for the short-run effect on Ml, as well as lagged effects on GNP.

The seasonal adjustment indices for the monetary base growth rate show stimulative strategies for both political parties. The finding is that both parties show a lower variance in the monetary base growth rate in the pre-election year for both congressional and presidential elections.

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