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Inflated Expectations: How Government Partisanship ShapesMonetary 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 economicpolicies they are likely to pursue. A common rule of thumb is thatleft-party governments are expected to pursue policies for lowerunemployment, but which may cause inflation. Right-party governments areexpected to pursue lower inflation policies. How do these expectations shapethe inflation forecasts of monetary policy bureaucrats? If there is amismatch between the policies, bureaucrats expectgovernments to implement, and those that they actually do,forecasts will be systematically biased. Using US Federal Reserve Staff’sforecasts we test for executive partisan biases. We find that irrespectiveof actual policy and economic conditions forecasters systematicallyoverestimate future inflation during left-party presidencies andunderestimate future inflation during right-party ones. Our findings suggestthat partisan heuristics play an important part in monetary policybureaucrats’ inflation expectations.

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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 ofGovernance, Friedrichstraße 180. 10117, Berlin (gandrud@hertie-school.org). CassandraGrafström is a PhD candidate in the University of Michigan, 5700 HavenHall, 505 S. State Street Ann Arbor, MI 48109-1045 (cgrafstr@umich.edu). The authors thankMark Hallerberg and the Fiscal Governance Centre at the Hertie Schoolof Governance for comments and support. The authors also thankLeonardo Baccini, Vincent Arel-Bundock, Mark Kayser, CherylSchonhardt-Bailey, Tom Stark, and seminar participants at the HertieSchool of Governance, London School of Economics, and YonseiUniversity as well as two anonymous reviewers. To view supplementarymaterial for this article, please visit http://dx.doi.org/10.1017/psrm.2014.34

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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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