6 - The Federal Reserve and its institutional environment: a review

Summary

Introduction

The Federal Reserve System is perhaps the most controversial nonelected element of the government of the United States. Journalists and voters vilify it, Congress and the president seek to dominate it, and scholars argue about it. Our focus is on the literature that considers the political accountability and responsiveness of the U.S. monetary authority. This body of work has undergone a clear evolution over time, going from a view of the Fed that took for granted its autonomy toward a perspective that debates the agency's independence and seeks to illuminate the avenues of political influence on it.

Because of the importance of the Fed in shaping monetary and overall economic policy, it is a powerful weapon. If political actors could gain control of it and learn how to use it effectively, there is little question that the executive, the Congress, and other external actors could better their own lot by providing useful service to grateful constituents. The question is, can political actors influence the Fed, and if so, how? The literature contains some hints that both the Congress and the executive have at least occasionally succeeded in influencing monetary policy, presumably to their electoral benefit. But these results are controversial, and the only real agreement to date is that there exists no consensus on their validity.

We shall not presume in this brief setting to describe at length the issues in this controversy or to take a position on them. Instead, our goal is to trace the evolution of scholarly work on the Federal Reserve's political accountability.