Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee

Henry W. Chappell, Jr., Rob Roy McGregor, Todd Vermilyea

MIT Press, Dec 30, 2004 - Business & Economics - 336 pages

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.

Contents

• Introduction: 1
• 12 Organization of the Book: 3
• Institutional Background: 7
• 22 DecisionMaking Processes within the FOMC: 9
• 23 Monetary Policy Operating Procedures: 12
• 24 Conclusions: 16
• Analytical Background: 17
• 32 The Federal Reserve as a Bureaucracy: 19
• 33 The Theory of the Time Inconsistency Problem: 21
• 34 Committee Reaction Function Studies: 22
• 35 Analysis of FOMC Voting Records: 25
• 36 Conclusions: 27
• A Long History of FOMC Voting Behavior Individual Reaction Functions and Political Influence on the Monetary Policy Decision Process: 29
• 41 A Model of FOMC Decision Making: 31
• 42 Data Considerations: 35
• Individual FOMC Members: 37
• 44 Political Influences on the Monetary Policy Decision Process: 45
• 45 Conclusions: 56
• Data from the Memoranda of Discussion and FOMC Transcripts: 57
• 51 Data from the Textual Records of FOMC Meetings: 58
• The Burns Years: 59
• The Greenspan Years: 64
• 54 Conclusions: 69
• Estimating Reaction Functions for Individual FOMC Members: 71
• 61 Individual Reaction Functions: 72
• The Burns Era: 74
• 63 Burns Era Econometric Results in Historical Perspective: 79
• The Greenspan Era: 85
• 65 Greenspan Era Econometric Results in Historical Perspective: 87
• 66 Conclusions: 94
• Majority Rule Consensus Building and the Power of the Chairman Arthur Burns and the FOMC: 97
• 71 The Power of the Chairman and the Allure of Consensus: 99
• 72 Constructing Preference Profiles for the FOMC: 101
• Empirical Models: 106
• Empirical Results: 107
• Extensions: 112
• 76 Conclusions: 117
• FOMC Decisions during the Greenspan Years: 119
• 81 Greenspans Influence on the Committee: 120
• 82 The Committees Influence on Greenspan: 125
• 83 Sources of Greenspans Influence: 128
• 84 Conclusions: 137
• Political Influences on Monetary Policy Decision Making Evidence from the Memoranda and the Transcripts: 139
• 91 External Political Pressures on the FOMC: 140
• 92 Electoral Cycles: 146
• 93 The FOMC and the Provision of Information: 151
• 94 Conclusions: 159
• Time Inconsistency and the Great Inflation Evidence from the Memoranda and the Transcripts: 161
• 101 The Basic Time Inconsistency Model of Monetary Policy: 164
• 102 The Case for Time Inconsistency: 165
• 103 The Time Inconsistency Explanation of Inflation: 171
• 104 Alternative Explanations for the Great Inflation: 174
• 105 Time Inconsistency Theory and the Greenspan Years: 177
• 106 Conclusions: 180
• Conclusions: 183
• 112 Opportunities for Future Research: 187
• 113 Implications for Central Banking Institutions: 189
• Appendix 1 Voting Data: 193
• Appendix 2 Estimation of Individual Reaction Functions Using Dissent Voting Data: 197
• Appendix 3 Estimation of Individual Reaction Functions Using Data from the Memoranda and the Transcripts: 199
• Appendix 4 Burns Era Preference Profiles by Meeting: 205
• Appendix 5 Greenspan Era Preference Profiles by Meeting: 255
• References: 295
• Index: 303

About the author

Henry W. Chappell, Jr., is Professor of Economics at the University of South Carolina.

Rob Roy McGregor is Associate Professor of Economics at the University of North Carolina, Charlotte.

Todd A. Vermilyea is Supervisory Economist, Federal Reserve Bank of Philadelphia.

Bibliographic information

• Title: Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee; The MIT Press
• Authors: Henry W. Chappell, Jr., Rob Roy McGregor, Todd Vermilyea
• Edition: illustrated
• Publisher: MIT Press, 2004
• ISBN: 0262262207, 9780262262200
• Length: 336 pages
• Subjects: Business & Economics / Economic History