Appointing Central Bankers: The Politics of Monetary Policy in the United States and the European Monetary Union.

By Kelly H. Chang. Cambridge: Cambridge University Press, 2003. 160p. $50.00.

The Federal Reserve (Fed) is one of the most powerful—and seemingly independent—American bureaucracies. This book insightfully integrates much of the research on the Fed appointment process and makes an important contribution to our understanding of the role of elected officials in the Fed policymaking process. By adapting the tools she uses to analyze Fed policymaking, Kelly Chang also enhances our understanding of appointment politics at the European Central Bank (ECB).

In the case of the Fed, Chang examines the extent to which “politicians influence monetary policy through appointments” (p. 4) and “[w]ho influences appointments” (p. 6). With existing theories of appointment politics and previous work on the Fed appointment process as stepping-stones, she constructs a sophisticated model of Fed appointments. To test the implications of the model, she develops a procedure for estimating presidential, senatorial, and Federal Open Market Committee (FOMC) member preferences in a common policy space. Once the actors' ideal points are identified, it is possible to predict the outcome of any particular appointment opportunity and then to compare the model's predictions with the empirical record. The analysis supports two conclusions that are broadly consistent with the recent literature: 1) Politicians influence Fed policy through the appointment process, and 2) both the president and the Senate can influence appointments, though their relative influence varies over time.

Chang then adapts her appointment theory to the European Monetary Union (EMU) in order to understand the likely future of ECB policy and the impact of EMU expansion on ECB policy. A brief, but thorough, description of the ECB provides the context for the appointment model presented in the volume. Somewhat surprisingly, the model suggests that the future incorporation of countries with relatively inflationary preferences will have no impact on EMU monetary policy. In this respect, the analysis counters the conventional wisdom, a perspective that assumes “a sort of mean monetary policy among the preferred policies of member countries” (p. 92). More should be made of this result. If the model captures the politics of the ECB appointment process, it is, in fact, impossible for any enlargement of the EMU to independently impact (positively or negatively) interest rates. Barring a wholesale preference shift by all of the original countries on one side of the status quo policy position to the other side, the unanimity rule plainly precludes any appointments that would result in a policy change. ECB policy should be extraordinarily stable; it should manifest as something like a monetary policy rule centered on the initial policy. These implications are easily testable, and EMU development will be interesting to watch under these extraordinarily restrictive policymaking arrangements.

Finally, Chang examines the historical development of the Fed appointment process. The 1900 to 1935 period is characterized as an era of conflict between the supporters of a centralized Fed over which elected officials had little control (Republicans and eastern bankers) and a decentralized Fed controlled by officials appointed by the president (Democrats, rural bankers, farmers, and small businessmen). According to Chang, the Federal Reserve Act (1913) created a decentralized Fed run by political appointees due to the Democrats' electoral success in 1912. Later, the severity of the Great Depression ended opposition to centralization, and the Democrats passed a subsequent Federal Reserve Act (1935) creating the centralized modern Fed. Though historically interesting, the chapter is theoretically thin. Specifically, the treatment of the politics of the creation and development of the Fed fails to explain one of the most interesting facts in the historical record: the Democrats' willingness to scale back the appointment power in 1935. Given the discussion in the book, the Republicans should have preferred the 1935 revisions (due to the increased centralization), whether or not elected officials maintained their level of appointment control. It is unclear, then, how the Republicans elicited concessions that appear patently unnecessary. There are reasonable explanations (i.e., centralization and appointment power were inseparable for the eastern bankers), but they are inconsistent with Chang's treatment of the issue.

Ironically, the book's primary contribution—the development of a procedure for placing the ideal points of presidents, senators, and FOMC members in a common policy space—is also a central weakness. A number of ideal point estimates will surprise readers familiar with Fed policymaking. For example, Nancy Teeters, “the quintessential monetary policy liberal” (p. 9), has a more conservative ideal point than half of her FOMC colleagues. Alan Greenspan is apparently more liberal than three-quarters of the FOMC, and G. William Miller is the single most conservative FOMC member. The presidential estimates are no better; they are, according to Chang, “somewhat surprising” (p. 54). From most liberal to most conservative—on monetary policy—the presidents are H. W. Bush, Nixon, Ford, Carter, Reagan, and Clinton. As Republicans tend to be more conservative than Democrats, these are definitely unconventional findings. And the one Republican apparently placed correctly—Reagan—was famous for supply-side, soft-money Fed appointees (e.g., Martha Seger, third most liberal FOMC member on Chang's list). Such senators as Carol Moseley-Braun (D-IL) (at the far right end of Chang's distribution) also appear out of place.

There is a considerable amount of research on the monetary policy preferences of FOMC members and presidents, and even some work on senatorial monetary policy preferences (see Thomas Havrilesky's [1995] The Pressures on Monetary Policy, 2d edition, for a description of these literatures). In most cases, the raw data upon which Chang's estimates are based are the same raw data used by others contributing to this literature. The new estimates are all in a common policy space, and that is a significant achievement, but the absence of any effort to reconcile the new estimates with those in the existing literature is disappointing.

Overall, Appointing Central Bankers makes an important contribution to our understanding of appointment power dynamics and their impact on monetary policy in the United States and the ECB. It is a “must read” for students of these institutions and should become an important methodological reference for students of other central banks and other types of regulatory agencies.