DOES THE FEDERAL-RESERVE CREATE POLITICAL MONETARY CYCLES

This research examines the existence of a political monetary cycle tha t would help incumbents create political business cycles. Previous res earch in this area examined similar issues but employed a reaction fun ction that forced the author to make a specific determination as to th e policy target employed by the Federal Reserve across a given time pe riod. The relevant literature reveals that if the Federal Reserve is a ttempting to optimize policy response to external shocks, then some mi xture of interest rate and monetary aggregate targets is superior to e ither target individually. The model in this paper solves this problem through the use of the g1 coefficient, The g1 coefficient is derived from the underlying behavior of the Federal Reserve in its attempt to choose and employ the optimal policy targets necessary for offsetting unanticipated shocks to the economy. The change in g1 is regressed on twelve electoral variables to determine the impact of presidential ele ctions on Federal Reserve policy.