fed
(Disclaimer: I am not an economist, nor a political analyst, nor a statistician.)
J K Galbraith (son of the J K Galbraith and a notable economist in his own right) and two co-authors have published an analysis of the US Federal Reserve's monetary policy, purporting to give strong evidence that, since 1983,
- the Fed's goal is to keep unemployment from getting too low, not to keep inflation from getting too high; when both unemployment rates and inflation rates are included in their model, the dependence on the former is much stronger than on the latter (and this is true robustly across multiple models);
- the Fed does not ease its monetary policy when unemployment is very high, as you might expect if it aims to fight recessions;
- the Fed systematically, consistently, manipulates interest rates as presidential elections approach, lowering them when the incumbent is a Republican and (to a lesser extent) raising them when the incumbent is a Democrat;
- this last political consideration plays as big a role in determining the Fed's monetary policy as inflation and unemployment together do.
It seems to me that the first point could have a not-so-odious interpretation: if low unemployment is (or is believed to be) a good leading indicator of high inflation, reacting to low unemployment might be a better way of keeping inflation down than waiting for high inflation rates. Or reacting to some other leading indicator of inflation might look like reacting to low unemployment. However, the paper also purports to show that low unemployment is not in fact a good predictor of high inflation in the future. (Maybe it isn't one because the Fed reacts so promptly to low unemployment. But that seems like a stretch.)
Galbraith talked about this to the House Committee on Financial Services, and his comments offer some useful further insights, especially on inflation.
I wonder what a similar study of the Bank of England would find.