Recent legislation to rein in Fed power, including the Fed Oversight Reform and Modernization (FORM) Act, has generated a load of opinion pieces and acrimonious debate, but so far little in the way of in-depth policy research. The purpose of the papers and analysis in a newly published book is to do such research.
The book, Central Bank Governance Oversight and Monetary Reform edited by John Cochrane and me, comes out of a conference held at the Hoover institution last year. The papers by the monetary experts in the book are interesting and candid, and they raise new questions about the effectiveness of Fed deliberations. The whole book is now available for purchase and the individual chapters as well as the discussion and policy debate (maybe the best part) can be downloaded for free. Here’s a list of contents starting with a Preface by John Cochrane and me:
ONE: How Can Central Banks Deliver Credible Commitment and Be “Emergency Institutions? by Paul Tucker with Comments by John H. Cochrane, and General Discussion with Michael D. Bordo, John H. Cochrane, Peter Fisher, Robert Hodrick, Charles I. Plosser, George P. Shultz, John B. Taylor, Paul Tucker, Kevin M. Warsh
TWO: Policy Rule Legislation in Practice by David H. Papell, Alex Nikolsko-Rzhevskyy and Ruxandra Prodan with Comments by Michael Dotsey and General Discussion by John H. Cochrane, Michael Dotsey, Peter Fisher, Andrew Levin, David H. Papell, Charle I. Plosser, John B. Taylor, Paul Tucker, Carl E. Walsh, John C. Williams
THREE: Goals versus Rules as Central Bank Performance Measures by Carl E. Walsh with Comments by Andrew Levin and General Discussion by John H. Cochrane, Michael Dotsey, David H. Papell, John B. Taylor, Carl E. Walsh, John C. Williams
FOUR: Institutional Design: Deliberations, Decisions, and Committee Dynamics by Kevin M. Warsh with Comments by Peter Fisher and General Discussion by Binyamin Appelbaum, Michael D. Bordo, John H. Cochrane, Michael Dotsey, Peter Fisher, Andrew Levin, Charles I. Plosser, George P. Shultz, Paul Tucker, Kevin M. Warsh, John C. Williams
FIVE: Some Historical Reflections on the Governance of the Federal Reserve by Michael D. Bordo with Comments by Mary H. Karr and General Discussion with Michael D. Bordo, John H. Cochrane, Peter Fisher, Mary H. Karr, Andrew Levin, Charles I. Plosser, George P. Shultz, John B. Taylor, Paul Tucker, Kevin M. Warsh, John C. Williams
SIX: Panel on Independence, Accountability, and Transparency in Central Bank Governance with Charles I. Plosser, George P. Shultz, and John C. Williams and General Discussion byMichael J. Boskin, John H. Cochrane, Peter Fisher, Robert Hodrick, Andrew Levin, David Papell, Charles I. Plosser, John B. Taylor, Paul Tucker, Kevin M. Warsh, John C. Williams
To get an idea what’s in the book, here’s a quick summary: In the first chapter Paul Tucker shows that a systematic strategy for setting the instruments of policy is desirable, but that integrating that strategy into a discretionary lender-of-last resort function is difficult. He concludes that “the central bank…should publish the Operating Principles” stressing that simply doing this “is more important than that any particular set of principles or any particular instrument-rule be entrenched in the law.” John Cochrane has different views. He argues that “Crisis-response and lender-of-last-resort actions need rules, or ‘regimes,’ even more than monetary policy actions need rules.”
Next David Papell and his colleagues explore how the recent legislation to require the Fed to adopt a policy rule would work in practice. This is the first paper to apply formal econometric methods to these legislative questions, and it generated a heated commentary from Mike Dotsey and discussion by many others.
Carl Walsh then investigates whether a policy “rules requirement” could improve on a “goals requirement” in which the central bank is simply required to achieve a goal of 2% inflation. He finds that in the case where the required rule is optimal one should put all the weight on the rules-based requirement, but if the required rule is not optimal then the weight depends on whether shocks are demand-side or supply-side. Andy Levin argues that the gains from using and reporting on the central bank’s strategy for the instruments go well beyond the calculations in Walsh’s paper.
Kevin Warsh’s report on the lack of effective deliberations at the FOMC is one of the most surprising parts of the book. In his commentary Peter Fisher notes Warsh’s refreshing candor, and uses it to jump off on a critique of policy committees, including the unwillingness of committee members to change priors when presented with new arguments or data.
Michael Bordo argues for a diversity of opinion coming from the district Fed banks and their presidents, and the danger of centering more power in Washington. He prefers a more rules-based monetary policy as in the legislation. In discussing Bordo’s paper, Mary Karr reviews the ways in which there are checks and balances in the current system.
In a concluding policy chapter, John Williams notes that Fed minutes are becoming too detailed and thereby detract from Fed deliberations, Charles Plosser indicates the FOMC deliberations are more constructive when viewed from a multi-meeting perspective than by a single meeting, and George Shultz argues that the Fed is in dire need of developing and communicating a strategy for the policy instruments.
In general, the authors in the book agree that rules-based monetary policy is important, but disagree about how a central bank should deliberate, implement and communicate about such policies. So there is more to think about at the next Hoover monetary conference which is on May 5.