Inflated Expectations

Christopher Gandrud and Cassandra Grafström

These files comprise the paper ''Inflated Expectations: How government partisanship shapes bureaucrats' inflation expectations''.

The paper is forthcoming at Political Science Research and Methods.

About

Governments' party identifications can indicate the types of economic policies they are likely to pursue. A common rule of thumb is that left-party governments are expected to pursue policies for lower unemployment, but which may cause inflation. Right-party governments are expected to pursue lower inflation policies. How do these expectations shape the inflation forecasts of monetary policy bureaucrats? If there is a mismatch between the policies bureaucrats expect governments to implement and those that they actually do, forecasts will be systematically biased. Using US Federal Reserve Staff’s forecasts we test for executive partisan biases. We find that irrespective of actual policy and economic conditions forecasters systematically overestimate future inflation during left-party presidencies and underestimate future inflation during right-party ones. Our findings suggest that partisan heuristics play an important part in monetary policy bureaucrats' inflation expectations.

Reproduce the paper (including analyses, plots, and tables)

The R and knitr source code and data for reproducing the analyses, plots, tables and text is in this DVN repository. We used R version 3.1.1.

To reproduce the figures and all of the analyses:

1. Install the necessary R packages using the following code:

install.packages(c("apsrtable", "ggplot2", "gridExtra", "DataCombine",
                "devtools", "knitr", "Matching", "MatchIt", "MCMCpack",
                "plotrix", "plyr", "repmis", "reshape", "reshape2", 
                "rgenoud", "stringr", "xtable", "Zelig"))

2. Knit the main_GreenBook.Rnw and supplemental_GreenBook.Rnw files in the PSRM_dvn folder. This reproduces all of the analyses, tables, figures, and text for both the Main Paper and Supplementary Materials:

# Remember to set the working directory to the PSRM_dvn folder.

library(knitr)

knit2pdf('main_GreenBook.Rnw')
knit2pdf('supplemental_GreenBook.Rnw')

Data

The data set we used in the paper is called PSRM_dvn/Data/GB_FRED_cpi_2007.csv. The README_data.html file contains variable descriptions.