Monetary and Fiscal Constitutions and the Bureaucratic Behavior of the Federal Reserve

Abstract

A body of literature has developed that models the Federal Reserve as a self- interested bureaucracy, and not simply as an altruistic bureau guided only by a concern with the public interest. This literature focuses on the monetary constitution—the institutional arrangements and relationships under which the Federal Reserve operates. However, the Federal Reserve also operates under a fiscal constitution (the institutional arrangements that guide development of a federal budget). This is because the Federal Reserve is an agent of Congress. Unfortunately, this important principal-agent relationship has not been incorpo rated into the examinations of the bureaucratic behavior of the Federal Reserve. The purpose of this article is to reexamine the Federal Reserve's tendency to engage in expense-preference behavior while controlling for both monetary and fiscal constitutions.