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

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

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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
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

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
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
257
References
297
Index
305
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