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Federal Reserve Structure and the Production of Monetary Policy Ideas

Author

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  • Michael D. Bordo
  • Edward Simpson Prescott
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.

Suggested Citation

  • Michael D. Bordo & Edward Simpson Prescott, 2023. "Federal Reserve Structure and the Production of Monetary Policy Ideas," Working Papers 23-29, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:97331
    DOI: 10.26509/frbc-wp-202329
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    More about this item

    Keywords

    Federal Reserve System; monetary policy; governance; time consistency;
    All these keywords.

    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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