Committee Decisions on Monetary Policy

Abstract

An examination of how the policy preferences of individual members of the Federal Open Market Committee are translated into monetary policy decisions. In many countries, monetary policy decisions are made by committees. In the United States, these decisions are made by the Federal Reserve's Federal Open Market Committee (FOMC), which consists of the seven members of the Board of Governors and the presidents of the twelve district banks. This book examines the process by which the preferences of the FOMC's individual members are translated into collective policy choices. This focus on the aggregation of individual preferences into group decisions is unique and provides an important perspective on the evolution of monetary policy choices. To study decision making by the FOMC, the authors have used both formal voting records and detailed transcripts and summaries of deliberations contained in the committee's Memoranda of Discussion and FOMC Transcripts. The latter sources have been used to construct data sets describing individual committee members' policy preferences for the 1970-1978 and 1987-1996 periods when the FOMC was chaired by Arthur Burns and Alan Greenspan, respectively. These data are used to estimate monetary policy reaction functions for individual Committee members and to explore the role of majoritarian pressures, pressures for consensus, and the power of the chairman in collective decision making. The rich anecdotal evidence found in the Memoranda of Discussion and FOMC Transcripts inspires the narrative approach taken in two chapters, on the influence of political pressure on FOMC deliberations and on the relevance of the time inconsistency problem for the rise of inflation in the 1970s.

On Committees of Experts

“…Schultz, a former Governor and Vice-Chairman of the FOMC, states it succinctly: "We should argue in the Board meetings but close ranks in public" [Greider 1987, p. 390]. Our first result is consistent with the observation made by Chappell, McGregor, and Vermilyea [2005] that disagreements within the FOMC do not show up in voting records. Illustrative is their finding that the number of dissenting votes on policy directives is rather small, only 8 percent of all votes in the period 1966 -1996.…”

Optimal central banker contracts and common agency: a comment

“…7 The inflation (or deflation) bias is also null when the contracts designed by the government and the interest group continue to be, respectively, t 0 − tπ and τ 0 − τ ( π − π), but the government also selects a central banker whose weight on the incentive scheme is ξ = zψα b π . Moreover, Proposition 3 supports the claim expressed by Chappell et al (2005) dismissing the possibility of a bias toward deflation.…”

The Dynamic (In)Efficiency of Monetary Policy by Committee

“…Note that the chairman's proposals will never be rejected in equilibrium 12 . This implication is in line with historical records from the FOMC that show that a chairman's recommendation has never been voted down by the committee (see, Chappell, McGregor, and Vermilyea 2005). 13 As a solution concept, we adopt Markov perfection.…”

“…Chappell, McGregor, and Vermilyea (2005, p. 128) point out that “at almost every meeting in our sample, Greenspan spoke first, offered a proposal, and defended it.”…”

“…Meade and Sheets (2005) report evidence that FOMC district bank presidents react to regional shocks. Chappell, McGregor, and Vermilyea (2005, ch. 6.3) document the division within the FOMC between Keynesian and Monetarist members during Arthur Burns' chairmanship.…”