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Inflated Expectations: How Government Partisanship Shapes Monetary Policy Bureaucrats’ Inflation Forecasts

Published online by Cambridge University Press:  04 December 2014

Christopher Gandrud Open the ORCID record for Christopher Gandrud [Opens in a new window]  and
Cassandra Grafström
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Abstract

Governments’ party identifications can indicate the types of economic policies they are likely to pursue. A common rule of thumb is that left-party governments are expected to pursue policies for lower unemployment, but which may cause inflation. Right-party governments are expected to pursue lower inflation policies. How do these expectations shape the inflation forecasts of monetary policy bureaucrats? If there is a mismatch between the policies, bureaucrats expect governments to implement, and those that they actually do, forecasts will be systematically biased. Using US Federal Reserve Staff’s forecasts we test for executive partisan biases. We find that irrespective of actual policy and economic conditions forecasters systematically overestimate future inflation during left-party presidencies and underestimate future inflation during right-party ones. Our findings suggest that partisan heuristics play an important part in monetary policy bureaucrats’ inflation expectations.

Type
Original Articles
Information
Political Science Research and Methods , Volume 3 , Issue 2 , May 2015 , pp. 353 - 380
Copyright
Copyright © The European Political Science Association 2014 

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Footnotes

*

Christopher Gandrud is a Post-Doctoral Fellow in the Hertie School of Governance, Friedrichstraße 180. 10117, Berlin ([email protected]). Cassandra Grafström is a PhD candidate in the University of Michigan, 5700 Haven Hall, 505 S. State Street Ann Arbor, MI 48109-1045 ([email protected]). The authors thank Mark Hallerberg and the Fiscal Governance Centre at the Hertie School of Governance for comments and support. The authors also thank Leonardo Baccini, Vincent Arel-Bundock, Mark Kayser, Cheryl Schonhardt-Bailey, Tom Stark, and seminar participants at the Hertie School of Governance, London School of Economics, and Yonsei University as well as two anonymous reviewers. To view supplementary material for this article, please visit http://dx.doi.org/10.1017/psrm.2014.34

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Supplementary material: Link

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http://dx.doi.org/10.7910/DVN/25730
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Gandrud and Grafström Supplementary Material

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Supplementary material: PDF

Gandrud and Grafström Supplementary Material

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