Does Deliberation Matter in FOMC Monetary Policymaking? The Volcker Revolution of 1979

Posted: 18 Aug 2009

See all articles by Andrew John Bailey

Andrew John Bailey

Bank of England; Bank of England - Prudential Regulation Authority

Cheryl Schonhardt-Bailey

London School of Economics & Political Science (LSE) - Department of Government

Date Written: Autumn 2008

Abstract

In monetary policy, decision makers seek to influence the expectations of agents in ways that can avoid making abrupt, dramatic, and unexpected decisions. Yet in October 1979, Chairman Paul Volcker led the Federal Reserve's Federal Open Market Committee (FOMC) unanimously to shift its course in managing U.S. monetary policy, which in turn eventually brought the era of high inflation to an end. Although some analysts argue that “the presence and influence of one individual” - namely, Volcker - is sufficient to explain the policy shift, this overlooks an important feature of monetary policymaking. FOMC chairmen-however, omnipotent they may appear-do not act alone. They require the agreement of other committee members, and in the 1979 revolution, the decision was unanimous. How, then, did Chairman Volcker manage to bring a previously divided committee to a consensus in October 1979, and moreover, how did he retain the support of the committee throughout the following year in the face of mounting political and economic pressure against the Fed? We use automated content analysis to examine the discourse of the FOMC (with this discourse recorded in the verbatim transcripts of meetings). In applying this methodology, we assess the force of the arguments used by Chairman Volcker and find that deliberation in the FOMC did indeed “matter” both in 1979 and 1980. Specifically, Volcker led his colleagues in coming to understand and apply the idea of credible commitment in U.S. monetary policymaking.

Suggested Citation

Bailey, Andrew John and Schonhardt-Bailey, Cheryl, Does Deliberation Matter in FOMC Monetary Policymaking? The Volcker Revolution of 1979 (Autumn 2008). Political Analysis, Vol. 16, Issue 4, pp. 404-427, 2008, Available at SSRN: https://ssrn.com/abstract=1448436 or http://dx.doi.org/10.1093/pan/mpn005

Andrew John Bailey

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority

20 Moorgate
London, EC2R 6DA
United Kingdom

Cheryl Schonhardt-Bailey

London School of Economics & Political Science (LSE) - Department of Government ( email )

Government Dept
London School of Economics
London WC2A 2AE
United Kingdom

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