Abstract:
While macroeconometricians continue to dispute the size, timing, and even the existence of effects of
monetary policy, political economists often find large effects of political variables and often attribute
the effects to manipulation of the Fed. Since the political econometricians often use smaller
information sets and less elaborate approaches to identification than do macroeconometricians, their
striking results could be the result of simultaneity and omitted variable biases. Alternatively, political
whims may provide the instrument for exogenous policy changes that has been the Grail of the policy
identification literature. In this paper, we lay out and apply a framework for distinguishing these
possibilities. We find almost no support for the hypothesis that political effects on the macroeconomy
operate through monetary policy and only weak evidence that political effects are significant at all.
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