Working Paper: NBER ID: w26098
Authors: Michael D. Bordo; Edward S. 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 by allowing for more competition in ideas and reducing groupthink.
Keywords: Federal Reserve; Monetary Policy; Decentralization; Economic Ideas
JEL Codes: B0; E5; G28; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decentralized structure of the Federal Reserve (E58) | Enhanced idea generation (O36) |
| Governance reforms implemented by Chairman William McChesney Martin in the 1950s (E58) | Emergence of new ideas (O36) |
| Governance structure (G38) | Reserve banks' ability to contribute to policy (E58) |
| Decentralized structure of the Federal Reserve (E58) | Contributions to key ideas such as monetarism and rational expectations (E65) |