Measuring Monetary Policy Stress for Fed District Representatives
| Date | 01 May 2016 |
| Published date | 01 May 2016 |
| DOI | http://doi.org/10.1111/sjpe.12104 |
| Author | Hamza Bennani |
MEASURING MONETARY POLICY
STRESS FOR FED DISTRICT
REPRESENTATIVES
Hamza Bennani*
ABSTRACT
This study provides a measure of the degree of stress that exists among Fed dis-
tricts in the US. Stress in a district is defined as the difference between the
desired interest rate of its representative and the actual policy rate implemented
by the FOMC. I find that the degree of stress reflects the stance of the US mon-
etary policy, a positive stress level in the 1990s (which corresponds to a policy
rate higher than the desired rate of FOMC members), and a negative stress level
from the 2000s (which corresponds to a policy rate lower than the desired rate
of FOMC members). However, the economic and financial crisis exacerbated
the degree of stress measure, suggesting an increase in monetary policy uncer-
tainty among FOMC members from that time.
II
NTRODUCTION
The Federal Open Market Committee (FOMC) is a system of 12 district Fed-
eral Reserve Banks,
1
composed by seven-member Board of Governors and
five rotating Bank presidents. On one hand, the presidents of the district
Reserve Banks are selected by the district Board of Directors, whose members
represent banking, agricultural, commercial, industrial, and public interests.
On other hand, members of the Board of Governors are appointed by the
President with the consent of the Senate. This appointment procedure induces
that Governors are not necessarily linked to the regions with which they are
affiliated.
2
Nevertheless, it is now widely agreed that all Federal Reserve’s monetary
policymakers have a regional identity. As emphasized by Meade and Sheets
(2005), either their positions carry some regional affiliation, or their region of
*Universit
e de Paris Ouest Nanterre-La D
efense
1
The 12 Federal Reserve Banks are located in the 12 Districts that were created by the
Federal Reserve Act of 1913. The banks are responsible for implementing the monetary pol-
icy set forth by the Federal Open Market Committee, and are divided as follows: Atlanta,
Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia,
Richmond, St Francisco, and St Louis. For more details, see Figure A1.
2
For instance, former Fed Vice Chairman Roger Ferguson, represented the Boston district
despite working in New York during the 17 years preceding his appointment.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12104, Vol. 63, No. 2, May 2016
©2015 Scottish Economic Society.
156
origin is a factor that must be considered during the selection process (Chap-
pell et al., 2008; Hayo and Neuenkirch, 2013; Eichler and La
¨hner, 2014b). As
a consequence, variation in regional economic activity is necessarily in the pol-
icymakers’ information set during FOMC meetings. This is illustrated by the
publication of the Beige Book by the Federal Reserve Board (i.e., an informal
survey of economic trends in different parts of the country) in the week prior
to each FOMC meeting, and is also evidenced in the FOMC transcripts: at
some point in the proceedings, Bank presidents make a statement about the
status of their region’s economy.
3
This regional identity is found to be relevant in the literature on FOMC vot-
ing behavior. Meade and Sheets (2005) show that Fed policymakers take into
account regional unemployment when voting on monetary policy, and that
these regional unemployment are more important for Board members than for
Reserve Bank presidents. Chappell et al. (2008) find that regional economic
conditions influence FOMC members’ preferred policies, and that both Gover-
nors and Reserve Bank presidents respond to regional conditions. Coibion and
Goldstein (2012) suggest that the Federal Reserve responds to the interregional
dispersion of unemployment rates over the time sample of 1983–2002. Finally,
Eichler and La
¨hner (2014b) find that regional house price developments signifi-
cantly influence the voting behavior of Fed Presidents, whereas board members,
on the contrary, are more concerned about the regional unemployment rate.
In parallel, another strand of the literature on FOMC voting behavior takes
inspiration from the partisan theory of politics. These studies have focused on
the background characteristics and political affiliations of central bankers, and
whether those characteristics or affiliations have an influence on FOMC mem-
bers’ voting behaviors (e.g., Belden, 1989; Gildea, 1990, 1992; Havrilesky and
Schweitzer, 1990; Havrilesky and Gildea, 1991, 1992, 1995).
The findings of this literature are summarized by Gerlach-Kristen and
Meade (2010) as follows: Board members prefer easier monetary policy than
Bank Presidents, while Board members appointed by Republican Presidents
favor tighter monetary policies than those appointed by Democratic Presi-
dents. However, and as evidenced by Gerlach-Kristen and Meade (2010), a
major issue with this literature is that it did not control for macroeconomic
conditions when estimating the determinants of voting behavior. Tackling this
issue, Chappell et al. (1997) and Chappell and McGregor (2000) estimate indi-
vidual monetary policy reaction functions to assess the preferences of each
policymaker.
4
The estimates presented in the latter studies confirm that Board
3
‘[T]he most likely scenario is that we are going to get back to the souffl
e economy-one
that is rather soft in the middle and firm around the edges. [I]f we see some weakness in our
area, that will make it difficult for those of us in the middle part of the country to have a
proper perspective on the appropriate national monetary policy.’-Cleveland Fed President
Jerry Jordan, FOMC Transcripts, November 16, 1999, p. 17.
4
The first to address this shortcoming was, nevertheless, Tootell (1991a,b, 1999), who
coded FOMC votes in terms of tighter, unchanged, or easier monetary policy and used them
as the dependent variable in a monetary policy reaction function. However, one shortcoming
with Tootell’s approach is that it ignores whether the vote was cast in agreement or dissent,
thereby ignoring useful information.
MEASURING US MONETARY POLICY STRESS 157
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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