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Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy

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  • Michael D. Bordo
  • Edward Simpson Prescott

Abstract

The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. 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. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve?s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.

Suggested Citation

  • Michael D. Bordo & Edward Simpson Prescott, 2019. "Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy," Working Papers 201913, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:191300
    DOI: 10.26509/frbc-wp-201913
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    References listed on IDEAS

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    Cited by:

    1. Michael D. Bordo & Andrew T. Levin & Mickey D. Levy, 2020. "Incorporating Scenario Analysis into the Federal Reserve’s Policy Strategy and Communications," NBER Working Papers 27369, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    financial regulation; monetary policy; governance; Federal Reserve System;

    JEL classification:

    • B0 - Schools of Economic Thought and Methodology - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H1 - Public Economics - - Structure and Scope of Government

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