Andrew John Bailey

Policy Shaping Politics: Monetary Policy Deliberations in Congressional Hearings, 1976-2008

The focus of this paper is on the relationship of the Federal Reserve vis-a-vis Congress, and in particular on the motivations of Members of Congress (MCs) as they oversaw the policy making decisions of the Fed from 1976 to 2008. We examine the evolution of congressional oversight of the Fed in order to better understand the thinking of MCs. Our approach is unusual in that it measures statistically the deliberations of Members of Congress in the House and Senate banking committees during the oversight hearings on monetary policy for eight periods (61 hearings) from 1976 to 2008. The reason for choosing this span of the history of US monetary policy is that it coincides with the Great Inflation of the 1970s, the radical action taken to cure that problem (initiated by the so-called Volcker Revolution of 1979), the subsequent period of stability and low inflation and ends with the early days of the current financial crisis. This was a period during which monetary policy also came to the forefront as the tool of macroeconomic stabilization. Some of our findings include: (1) MCs generally showed little interest in the detail of monetary policy making, seemingly willing to leave these details to the Fed; (2) MCs were actively engaged in challenging the Fed in the areas of governance, accountability and transparency; (3) the degree of challenge from Congress to the Fed appears to be negatively related to the success of the Fed in pursuing low inflation and stable economic growth; and (4) MCs of both parties failed to devote much attention to financial stability and bank regulation in the 1990s and early 21st century.