The role of political environments in the formation of Fed policy under Burns, Greenspan, and Bernanke…

Interesting paper by  Alexander William Salter of Texas Tech University  and Daniel J. Smith of Troy University.

How do political environments influence the behavior of economists who transition from academic and business environments to policymaking positions? And, more specifically, are an economist’s preexisting beliefs and principles congruent with their policy stances and actions once they transition into a policy role? These questions are particularly relevant when it comes to central banking, where academic and business economists are often selected for policy roles wielding substantial economic influence based partly on their stated monetary principles and beliefs. To address these questions, we analyze the writings and speeches of three economists, Arthur Burns, Alan Greenspan, and Benjamin Bernanke, as they transitioned to becoming chairman of the Fed. The tension between their previously stated views and their subsequent policy stances as chairman of the Fed, suggest that operation within political institutions impelled them to alter their views. Our findings offer additional support for incorporating the concerns of political economy into monetary models and structures.

Central banking is an inherently political activity, formal statements regarding “central bank independence” notwithstanding. Until monetary economics scholarship introduces political economy considerations not as a special case, but as a matter of routine or convention, permanent improvement in our understanding of what actually determines the stance of monetary policy are certain to be lacking.

Indeed.

There was a time when political economy was key to analysing most problems in economics. And something like central banking is political economy through and through. But political economy has become a special case as authors say and much of monetary economics is around models and abstraction..

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