Working Paper 00-04

Department of Economics

University of North Carolina, Chapel Hill

The Determinants of

Federal Reserve Policy Actions: A Reexamination

Richard T. Froyen*

Professor of Economics

University of North Carolina

Roger N. Waud

Professor of Economics

Virginia Tech

*Department of Economics,

University of North Carolina,

Chapel Hill, NC, 27514

Telephone: 919-966-5375



JEL Category E5


In a recent article (Journal of Macroeconomics,1997) we presented estimates of Federal Reserve reaction functions including variables representing economic and political influences. Our goal was to examine the relative importance of political versus economic influences in determining Federal Reserve actions, as well as to see which economic state variables influenced Federal Reserve actions during various time periods. This paper extends our earlier work in three ways. First, we re-estimate the monetary policy reaction functions in our earlier study in a way which obviates possible reverse causation problems and better approximates the information set that was available to the Open Market Committee at the time its decisions were made. Second, we now have five more years of data which allows us to examine the Greenspan years more fully; this takes us through 1994, the most recent year for which the Fed's Green Book forecasts are available, given the five-year lag in their release. Third, we divide our sample period, 1965-1994, into two sub-periods, pre-1979 and post-1979, to examine the view that the Federal Reserve evidenced greater concern for inflation in the latter sub-period

The essential change from our earlier study is to use the interval between FOMC meetings as our observation rather than a calendar month. This change is shown to have significant effects on the estimated importance of political factors and economic state variables as determinants of Federal Reserve actions.