Did FOMC Transparency Lead to Overly Low Interest Rates?

Remarkably, a post at VoxEU, “The dangers of increased transparency in monetary policymaking,” by Ellen Meade and David Stasavage suggest in that one of the effects of the Fed’s change in 1993 to publish the minutes of FOMC meetings was less candid discussion (no surprise) which led to greater Greenspan influence over interest rate policy, which then led to the looser monetary policy that the former Fed chief favored:

Analysis of FOMC transcripts before and after Committee members knew that they would be published shows how transparency deadened the debate and reduced the number of challenges to Greenspan’s position…

Economists have argued that greater transparency is beneficial….But greater transparency of central bank policymaking – in which committee deliberations are made more open to the public – may prevent the full and frank discussion needed to make the best decisions. In a recent paper (Meade and Stasavage 2008), we compare discussions of the Fed’s Federal Open Market Committee (FOMC) before and after committee members knew that all statements would eventually be made public. Our empirical results indicate that after 1993, when FOMC participants knew that their deliberations would be made public, they were less likely to challenge then Fed chairman Alan Greenspan. This suggests that greater transparency hindered free deliberation and may have permitted Greenspan’s views on interest rates to dominate US policymaking….

Over the time period that we examine (1989-1997), Chairman Greenspan presented his proposal for the setting of the policy interest rate first and then solicited other meeting participants for their views. After all the participants had expressed their opinions, an official vote was taken on the policy proposal. We focus our analysis on the willingness of the meeting participants to express verbal disagreement with Greenspan’s proposed policy before and after 1993.

The empirical results provide clear evidence of a change in the character of FOMC deliberations – policymakers were less likely to express verbal disagreement with Greenspan’s proposal after 1993. This remains the case even after other potential influences on officials’ views, such as a variety of measures of the current economic environment as well as Fed forecasts for inflation, are taken into account.

The post notes that Greenspan preferred closed-door discussions:

In Congressional testimony, Alan Greenspan argued against publication, saying that the FOMC “could not function effectively if participants had to be concerned that their half-thought-through, but nonetheless potentially valuable, notions would soon be made public” even with a publication lag of five years. Greenspan noted further that the character of the meetings would change with transcript publication, from lively, useful sessions to bland, sterile ones.

A fair bit of research on decision processes has found that groups of experts generally develop better estimates and solutions than individuals. Yet it appears that the need for more openness in Federal Reserve decision making undermined the ability of a high-level group to work through information and come to better answers.

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  1. Doug

    Transparency in process leads to less transparency in problem solving because key players keep their real thoughts to themselves. This pattern repeats itself throughout government. For first-hand experience, simply attend your next local town council meeting.

  2. Anonymous

    Doug’s comments are valid to a point. As a member of a board of supervisors in a township, the work around is to have come to a conclusion amongst yourselves via telephone and email erased before hand.

  3. Peripheral Visionary

    Interesting point. It validates what I’ve already discovered in working for the government: that, contrary to popular sentiment, there are very good reasons to have certain specific decision-making processes be less transparent. Interesting that people can see this with client-attorney privilege, but don’t always understand the concept when it’s other governmental processes.

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