The Political Economy of American Monetary Policy.

• Author: Smyth, David J.

Edited by Thomas Mayer. Cambridge: Cambridge University Press, 1990. Pp. x, 314. $42.50.

Is monetary policy made by an independent central bank devoted to the public interest using sophisticated economic analysis? The answer from the contributions to this book, mainly economics but a few political scientists, is "no." The Fed does not make policy to maximize public welfare subject only to the constraint that forecasting is difficult. The Fed does yield to political pressure and is constrained by organizational problems.

The opening chapter by the editor provides an introduction and a summary of the chapters. The following four chapters deal with Fed behavior. Willett finds that Congress as well as the president influences the FED. Khoury's examination of 42 previously published Fed reaction functions shows that there is no specification consensus and the results are not robust. Epstein and Schor attempt to show that the Fed is concerned with private sector profitability. They do not include such profitability directly in the Fed reaction function, instead they show that such profitability depends on variables included in the reaction function--growth, inflation and the cost of job loss for an average worker. However in the reaction function a key variable, the cost of job loss, is significant only when an extraneous variable is included and it is not a significant determinant of bank profits. Even if it were significant the conclusion that "the Fed is primarily concerned with financial and nonfinancial profitability . . . explains the Fed's strong inflation aversion and restrictive policies undertaken by the Federal Reserve to reduce the power of labor by increasing the cost of job loss" is a non sequitur as they present no evidence that the Fed's policies affect any components of the cost of job loss. Melton and Roley examine Federal Reserve Behavior after October 1979 from a financial market perspective. Changes in the Fed's operating procedures, targets and desire to achieve its targets led to at least three policy regimes in the 1980s.

The next six chapters deal with the extent to which the Fed is independent. The literature reviewed by Munger and Roberts is inconclusive in characterizing the political pressures on the conduct of monetary policy. Hetzel finds that the Fed resists the attempts of politicians to use monetary policy to redistribute income with the following results: politicians impose implicit rather than explicit...