Majority Rule, Consensus Building, and the Power of the Chairman: Arthur Burns and the FOMC

Chappell, Henry W.; McGregor, Rob Roy; Vermilyea, Todd A.

doi:10.1353/mcb.2004.0053

Cited by 54 publications

(41 citation statements)

References 24 publications

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“…Our original motivation in reading these source materials was not to investigate the time inconsistency issue. Rather, the original reading was required to code data on individual preferences on monetary policy targets for use in a quantitative analysis of FOMC decision-making (Chappell et al, 2004). As we undertook that work, however, we simultaneously accumulated a file of items related to policy issues that have been widely discussed in the economics literature.…”

Section: The Memoranda Of Discussion and The Ford Library Transcriptsmentioning

confidence: 99%

Did Time Inconsistency Contribute to the Great Inflation? Evidence From the Fomc Transcripts

Chappell

McGregor

2004

Economics & Politics

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We use evidence from detailed records of FOMC deliberations to argue that the theory of the time inconsistency problem provides a reasonable explanation of the Federal Reserve's excessively expansionary policy stance during the 1970-1978 period when Arthur Burns chaired the Board of Governors. The records suggest that the Fed perceived a Phillips curve tradeoff and political pressures that made it difficult to adopt disinflationary policies at any moment in time; the tendency toward excessively expansionary policy was exacerbated by the short-run planning horizon the Committee faced in each of a sequence of meetings. We further argue that comparative static predictions of the time inconsistency model are consistent with both the rise of inflation during the Burns years and its subsequent fall. 2 Did Time Inconsistency Contribute to the Great Inflation? Evidence from the FOMC TranscriptsThe time inconsistency problem is often invoked to explain an inflationary bias alleged to plague central banks. 1 The assumptions behind the reasoning are as follows.First, the central bank is assumed to choose policy actions on a period-by-period basis in each of its meetings; it is not constrained by rules, but instead uses discretion in each period. Second, public expectations of inflation for the upcoming period are viewed as given at the time of the meeting. Third, the economy can be characterized by an expectational Phillips curve; i.e., if inflation is higher than the public expects, unemployment will temporarily fall below its natural rate. Fourth, the central bank values a marginal reduction of unemployment below its natural rate, but is also averse to higher inflation. Finally, it is assumed that expectations are rational.With predetermined inflation expectations, the central bank sees an opportunity to lower unemployment via surprise money growth in each of its meetings. If expected inflation were zero, for example, the reduction in unemployment created by a money growth surprise would be "worth" the modest increase in inflation. However, a problem arises when public expectations are rational. The public, understanding the Fed's objectives, will correctly anticipate monetary stimulus, rendering the effort to reduce unemployment ineffective. Instead, the result is inflation. At the equilibrium level of inflation, the marginal gains from unemployment reduction are balanced by the added costs of additional inflation in the current period. This is suboptimal in comparison to a 1 Seminal contributions include Kydland and Prescott (1977) and Barro and Gordon (1983 Persson and Tabellini (2000), however, argue that these criticisms miss the point, since time inconsistency analysis does not predict that the Fed would want to generate policy surprises in equilibrium. Rather, in an inflationary equilibrium, the Fed's lack of credibility would cause a more restrictive policy to produce a recession. As a consequence, the Fed would refrain from pursuing a disinflationary policy. Some empirical evidence also supports the ...

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Section: The Memoranda Of Discussion and The Ford Library Transcriptsmentioning

confidence: 99%

Did Time Inconsistency Contribute to the Great Inflation? Evidence From the Fomc Transcripts

Chappell

McGregor

2004

Economics & Politics

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“…Interestingly, Besley et al (2008) also find that levels of disagreement in the MPC are significantly lower immediately following any policy changes. Another strand of literature that reveals differences in preferences focuses on the US Federal Reserve Federal Open Market Committee (FOMC) (Chappell et al, 1997;Chappell and McGregor, 2000;Chappell et al, 2004Chappell et al, , 2005. Typically, these differences are documented through the identification of different intercepts for estimated individual reaction functions.…”

Section: Related Literaturementioning

confidence: 99%

The dissent voting behaviour of central bankers: what do we really know?

et al. 2013

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“…In experimental studies, Blinder andMorgan (2008a, 2008b) find that groups with designated leaders do not outperform groups without leaders when playing a monetary policy game. Descriptive empirical studies have documented the dominating role of the Chairman, mostly in the Federal Reserve's Federal Open Market Committee; see, for instance, Chappell, McGregor and Vermilyea (2004, 2007a, 2007b. It is, for example, found that when Arthur Burns was the Chairman of the FOMC, his opinion counted about as much as all the other committee members put together.…”

Section: During the Meeting: On The Chairman's Role And The Willingnementioning

confidence: 99%

Picking the Brains of MPC Members

2010

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This paper reports and analyzes the results from a questionnaire sent to all present and former members of the Riksbank's Executive Board, the monetary policy committee (MPC) of the Swedish central bank. The questions cover a number of issues discussed in the growing literature on monetary policy making by committees. The paper thus relates research to the views of practitioners in a way that has not been done before. We find, among other things, that many members consider the six-person strong Riksbank MPC to be slightly too large, that it is very common that members have decided before the policy meeting how they will vote, and that members, when forming their opinions, consider input from the staff more important than input from their colleagues.

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Majority Rule, Consensus Building, and the Power of the Chairman: Arthur Burns and the FOMC

Cited by 54 publications

References 24 publications

Did Time Inconsistency Contribute to the Great Inflation? Evidence From the Fomc Transcripts

Did Time Inconsistency Contribute to the Great Inflation? Evidence From the Fomc Transcripts

The dissent voting behaviour of central bankers: what do we really know?

Picking the Brains of MPC Members

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