This paper combines new data and a narrative approach to identify variation in political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political pressure, I develop a narrative identification strategy based on President Nixon’s pressure on Fed Chair Burns. I exploit this narrative through restrictions on a structural vector autoregression that includes the President-Fed interaction data. I find that political pressure to ease monetary policy (i) increases the price level strongly and persistently, (ii) does not lead to positive effects on real economic activity, (iii) contributed to inflationary episodes outside of the Nixon era, and (iv) transmits differently from a typical monetary policy easing, by having a stronger effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, for six months, raises the price level by about 7% over the following decade.

We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.