IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14878.html
   My bibliography  Save this paper

The Power of the Federal Reserve Chair

Author

Listed:
  • Riboni, Alessandro
  • Ruge-Murcia, Francisco J.

Abstract

Transcripts from the meetings of the Federal Open Market Committee (FOMC) show that the policy proposed by its chair is always adopted with a majority of votes and limited dissent. An interpretation of this observation is that the power of the chair vis-a-vis the other members is so large that the policy selected by the committee is basically that preferred by the chair. Instead, this paper argues that the observation that the chair’s proposal is always approved is an equilibrium outcome: the proposal passes because it is designed to pass and it does not necessarily correspond to the policy preferred by the chair. We construct a model of inclusive voting where the chair has agenda-setting powers to make the proposal that is initially put to a vote but is subject to an acceptance constraint that incorporates the preferences of the median and the probability of counter-proposals. The model is estimated by the method of maximum likelihood using real-time data from FOMC meetings. Results for the full sample and sub-samples for each chair between 1974 and 2008 show that the data prefer a version of our model where the chair is moderately inclusive over a dictator model. Thus, the workings of the FOMC appear to be stable over time and no chair, regardless of personality and recognized ability, can deviate far from the median view.

Suggested Citation

  • Riboni, Alessandro & Ruge-Murcia, Francisco J., 2020. "The Power of the Federal Reserve Chair," CEPR Discussion Papers 14878, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14878
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP14878
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eijffinger, S.C.W. & Mahieu, R.J. & Raes, L.B.D., 2015. "Hawks and Doves at the FOMC," Discussion Paper 2015-013, Tilburg University, Center for Economic Research.
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. Baron, David P. & Ferejohn, John A., 1989. "Bargaining in Legislatures," American Political Science Review, Cambridge University Press, vol. 83(4), pages 1181-1206, December.
    4. Banks, Jeffrey S. & Duggan, John, 2006. "A General Bargaining Model of Legislative Policy-making," Quarterly Journal of Political Science, now publishers, vol. 1(1), pages 49-85, January.
    5. Malmendier, Ulrike & Nagel, Stefan & Yan, Zhen, 2021. "The making of hawks and doves," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 19-42.
    6. Stephen Hansen & Michael McMahon & Andrea Prat, 2018. "Transparency and Deliberation Within the FOMC: A Computational Linguistics Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(2), pages 801-870.
    7. Alessandro Riboni & Francisco J. Ruge-Murcia, 2008. "Preference Heterogeneity in Monetary Policy Committees," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 213-233, March.
    8. Belden, Susan, 1989. "Policy Preferences of FOMC Members as Revealed by Dissenting Votes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 432-441, November.
    9. Hülya Eraslan & Kirill S. Evdokimov, 2019. "Legislative and Multilateral Bargaining," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 443-472, August.
    10. Riboni, Alessandro & Ruge-Murcia, Francisco, 2014. "Dissent in monetary policy decisions," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 137-154.
    11. Eijffinger, S.C.W. & Schaling, E. & Verhagen, W.H., 1999. "A Theory of Interest Rate Stepping : Inflation Targeting in a Dynamic Menu Cost Model," Discussion Paper 1999-71, Tilburg University, Center for Economic Research.
    12. Lutz Kilian & Simone Manganelli, 2008. "The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1103-1129, September.
    13. Eraslan, Hulya & Evdokimov, Kirill S., 2019. "Legislative and Multilateral Bargaining," Working Papers 19-007, Rice University, Department of Economics.
    14. Thomas Romer & Howard Rosenthal, 1978. "Political resource allocation, controlled agendas, and the status quo," Public Choice, Springer, vol. 33(4), pages 27-43, December.
    15. Cardona, Daniel & Ponsati, Clara, 2011. "Uniqueness of stationary equilibria in bargaining one-dimensional policies under (super) majority rules," Games and Economic Behavior, Elsevier, vol. 73(1), pages 65-75, September.
    16. Elliott, Graham & Timmermann, Allan, 2002. "Optimal Forecast Combination Under General Loss Functions and Forecast Error Distributions," University of California at San Diego, Economics Working Paper Series qt15r9t2q2, Department of Economics, UC San Diego.
    17. repec:dau:papers:123456789/7717 is not listed on IDEAS
    18. repec:dau:papers:123456789/7683 is not listed on IDEAS
    19. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    20. Christina D. Romer & David H. Romer, 2004. "Choosing the Federal Reserve Chair: Lessons from History," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 129-162, Winter.
    21. Hansen, Stephen & McMahon, Michael & Velasco Rivera, Carlos, 2014. "Preferences or private assessments on a monetary policy committee?," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 16-32.
    22. EllenE. Meade & David Stasavage, 2008. "Publicity of Debate and the Incentive to Dissent: Evidence from the US Federal Reserve," Economic Journal, Royal Economic Society, vol. 118(528), pages 695-717, April.
    23. Petra Gerlach-Kristen & Ellen E. Meade, 2010. "Is There a Limit on FOMC Dissents? Evidence from the Greenspan Era," Working Papers 2010-16, American University, Department of Economics.
    24. Klodiana Istrefi, 2019. "In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy," Working papers 725, Banque de France.
    25. Bordo, Michael & Istrefi, Klodiana, 2023. "Perceived FOMC: The making of hawks, doves and swingers," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 125-143.
    26. Alessandro Riboni & Francisco J. Ruge-Murcia, 2010. "Monetary Policy by Committee: Consensus, Chairman Dominance, or Simple Majority?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 363-416.
    27. Havrilesky, Thomas & Gildea, John A, 1991. "The Policy Preferences of FOMC Members as Revealed by Dissenting Votes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 130-138, February.
    28. Sheng, Xuguang (Simon), 2015. "Evaluating the economic forecasts of FOMC members," International Journal of Forecasting, Elsevier, vol. 31(1), pages 165-175.
    29. Glenn D. Rudebusch, 1995. "Federal Reserve policy and the predictability of interest rates," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun23.
    30. Elliott, Graham & Timmermann, Allan, 2004. "Optimal forecast combinations under general loss functions and forecast error distributions," Journal of Econometrics, Elsevier, vol. 122(1), pages 47-79, September.
    31. Daniel L. Thornton & David C. Wheelock, 2000. "A history of the asymmetric policy directive," Review, Federal Reserve Bank of St. Louis, vol. 82(Sep), pages 1-16.
    32. Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
    33. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
    34. McKelvey, Richard D., 1976. "Intransitivities in multidimensional voting models and some implications for agenda control," Journal of Economic Theory, Elsevier, vol. 12(3), pages 472-482, June.
    35. Surico, Paolo, 2007. "The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 305-324, January.
    36. Guthrie, Graeme & Wright, Julian, 2004. "The Optimal Design of Interest Rate Target Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 115-137, February.
    37. Ellen E. Meade, 2005. "The FOMC: preferences, voting, and consensus," Review, Federal Reserve Bank of St. Louis, vol. 87(Mar), pages 93-101.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bordo, Michael & Istrefi, Klodiana, 2023. "Perceived FOMC: The making of hawks, doves and swingers," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 125-143.
    2. Baerg, Nicole Rae & Krainin, Colin, 2022. "Divided committees and strategic vagueness," European Journal of Political Economy, Elsevier, vol. 74(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Ruge‐Murcia, 2022. "How do central banks make decisions?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1643-1670, November.
    2. Carlos Madeira & João Madeira & Paulo Santos Monteiro, 2023. "The origins of monetary policy disagreement: the role of supply and demand shocks," BIS Working Papers 1118, Bank for International Settlements.
    3. Bordo, Michael & Istrefi, Klodiana, 2023. "Perceived FOMC: The making of hawks, doves and swingers," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 125-143.
    4. Alessandro Riboni & Francisco J. Ruge-Murcia, 2008. "The Dynamic (In)Efficiency of Monetary Policy by Committee," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 1001-1032, August.
    5. Ruge-Murcia, Francisco & Riboni, Alessandro, 2017. "Collective versus individual Decision-Making: A case study of the Bank of Israel Law," European Economic Review, Elsevier, vol. 93(C), pages 73-89.
    6. repec:dau:papers:123456789/7716 is not listed on IDEAS
    7. Hubert, Paul & Labondance, Fabien, 2021. "The signaling effects of central bank tone," European Economic Review, Elsevier, vol. 133(C).
    8. Riboni, Alessandro & Ruge-Murcia, Francisco, 2014. "Dissent in monetary policy decisions," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 137-154.
    9. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    10. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    11. Guido Schultefrankenfeld, 2020. "Appropriate monetary policy and forecast disagreement at the FOMC," Empirical Economics, Springer, vol. 58(1), pages 223-255, January.
    12. El-Shagi, Makram & Jung, Alexander, 2015. "Does the Greenspan era provide evidence on leadership in the FOMC?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 173-190.
    13. Christian Pierdzioch & Jan-Christoph Rülke & Peter Tillmann, 2013. "Using forecasts to uncover the loss function of FOMC members," MAGKS Papers on Economics 201302, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    14. repec:hal:spmain:info:hdl:2441/3mgbd73vkp9f9oje7utooe7vpg is not listed on IDEAS
    15. Jan C. van Ours, 2022. "How Retirement Affects Mental Health, Cognitive Skills and Mortality; an Overview of Recent Empirical Evidence," Tinbergen Institute Discussion Papers 22-050/V, Tinbergen Institute.
    16. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    17. Klodiana Istrefi, 2019. "In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy," Working papers 725, Banque de France.
    18. Paul Hubert & Fabien Labondance, 2019. "Central bank tone and the dispersion of views within monetary policy committees," Sciences Po publications 2019 – 08, Sciences Po.
    19. Chen, Jidong, 2023. "Sequential agenda setting with strategic and informative voting," Journal of Public Economics, Elsevier, vol. 226(C).
    20. Chen, Daniel L. & Michaeli, Moti & Spiro, Daniel, 2020. "Legitimizing Policy," IAST Working Papers 20-107, Institute for Advanced Study in Toulouse (IAST).
    21. Carlos Madeira & João Madeira, 2019. "The Effect of FOMC Votes on Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 921-932, December.
    22. repec:hal:spmain:info:hdl:2441/7v8fvu0bf08jcoi4epn8cutjm8 is not listed on IDEAS
    23. Baerg, Nicole Rae & Krainin, Colin, 2022. "Divided committees and strategic vagueness," European Journal of Political Economy, Elsevier, vol. 74(C).

    More about this item

    Keywords

    Inclusive-voting; Agenda-setting; Consensus; Fomc; Collective decision-making;
    All these keywords.

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14878. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.