Federal Reserve Structure and the Production of Monetary Policy Ideas

Michael Bordo and Edward Prescott

No 23-29, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on monetary policy over the 1960 - 2000 period. We document the introduction of monetarism, rational expectations, credibility, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s and the increased ties with academia that developed in this period. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure. We illustrate this with a time-consistency model in which a decentralized organization is better at producing new ideas than a centralized one. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure by allowing for more competition in formulating ideas and by reducing groupthink.

Keywords: Federal Reserve System; monetary policy; governance; time consistency (search for similar items in EconPapers)
JEL-codes: B0 E58 G28 H1 (search for similar items in EconPapers)
Pages: 48
Date: 2023-11-20
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Federal Reserve Structure and the Production of Monetary Policy Ideas (2023)
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DOI: 10.26509/frbc-wp-202329

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