Deliberation and Monetary Policy: Quantifying the Words of American Central Bankers, 1979-1999
84 Pages Posted: 13 Aug 2009 Last revised: 25 Aug 2009
Date Written: 2009
The story of what happened to change the course of monetary policy in the US from one of “anguish” to the successful establishment of persistent low inflation by Paul Volcker and Alan Greenspan since 1979 has been extensively studied, but in our view still has gaps in terms of understanding why and how policy changed. We examine the twenty year history of US monetary policy between 1979 and 1999 in order better to understand the preferences of policy makers as they deliberate in committee on the monetary policy decision. We employ text analysis software to explore the verbatim transcripts of FOMC meetings for three key periods (nine years) between 1979 and 1999 (1979-1981; 1991-1993 and 1997-1999). Rather than imputing preferences from votes, we use the actual words, arguments and rationales espoused by policy makers as they deliberated on the monetary policy decision. Our primary methodological goal is to obtain a systematic and quantifiable account of the decision making process in the FOMC meetings as the US moved from a period of high inflation to sustained low inflation. Among our key findings is that we observe (1) a clear decline in the role of deliberation in FOMC meetings in the late 1990s and an increasing weight on studying the state of the economy; (2) a change in the emphasis on the strategy of monetary policy that appears to be consistent with the greater credibility of low inflation over time; and (3) changes in the relative roles for reserve bank presidents and board governors from the late 1970s to the late 1990s.
Keywords: monetary policy, Federal Reserve, deliberation, FOMC, inflation, text analysis, content analysis
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