David Beckworth has a very interesting podcast where he interviewed Adam Posen, who heads the Peterson Institute for International Economics. During 2009-12, Posen served on the Monetary Policy Committee at the Bank of England. In his discussion with David, he pointed to some differences between the BoE and the Fed:
1. The BoE has “live meetings” where there is an informal, free flowing discussion among equals. Fed meetings tend to be more scripted and the outcome is generally pre-ordained.
2. At the BoE, the Governor (currently Mark Carney) can be outvoted at a given meeting, without there being any sort of catastrophic loss of credibility. In the US, things are always arranged so that the chair is in the majority, and indeed there are generally no more than 3 dissenters.
3. The Bank of England is less nationalistic than the Fed. Adam Posen was appointed to serve on the BoE despite being an American. Mark Carney heads the BoE, despite being a Canadian. Just imagine President Trump picking a Canadian to head the Federal Reserve Board.
4. The BoE has a Monetary Policy Committee to make monetary policy decisions, and a Financial Policy Committee to make financial policy decisions. What a strange idea! The British decided to have extremely important policy decisions made by people who are actually experts in the field, instead of rank amateurs. In the US, we think nothing of having extremely consequential monetary policy decisions made by people whose expertise is financial policy, or even worse, community banking.
I don’t want to oversell the difference here. I happen to believe in the “wisdom of crowds”, but there will be a number of occasions where a dictatorial Fed chair in the US will make better decisions than what you’d get out of a more egalitarian committee such as you find at the BoE. It would take a long period of time to establish that one regime is superior to the other. Indeed the US might have done better during the Great Recession if Bernanke’s approach had been more dictatorial. But in the long run, decision made by committees will generally be superior to those made by individuals, and decisions made by markets, will generally be superior to decisions made by committees. Ultimately, we need to move past the discretionary central banking model, and toward a system where market signals direct policy.
A good start would have the Fed announce a willingness to buy unlimited NGDP futures at a price implying 3% growth and sell unlimited NGDP futures at a price implying 5% NGDP growth. This would put “guardrails” on Fed policy, add to credibility and accountability, and finally begin to rein in the policy discretion that greatly worsened the Great Depression, the Great Inflation, and the Great Recession.
PS. The BoE’s Monetary Policy Committee has nine members. The inner core has the Governor (Carney), three deputy governors and the bank’s chief economist. There are also four external members, appointed to renewable 3-year terms. (That was Posen’s position.) Policy decisions are based on a simple majority vote, where the Governor has no extra influence.
PPS. In the podcast, Posen also had some very interesting remarks on the recent decline in foreign direct investment into the US.
READER COMMENTS
John Hall
Sep 27 2018 at 3:55pm
It was a good one. I would say that the benefit of a committee approach is a reduction in the variance of decisions. A single person driving policy works when you have a Benjamin Strong figure, but not so much with Arthur Burns
Scott Sumner
Sep 27 2018 at 6:29pm
John, I agree.
bill
Sep 27 2018 at 9:20pm
Anyone who has ever dealt with a community banker knows that they shouldn’t even be in charge of a community bank. Virtually any other small business owner would be just as good at monetary policy.
Salem
Sep 28 2018 at 5:00am
This is all well and good, but the BoE made all the same mistakes as the Fed during the GFC. You also shouldn’t undersell the role of the chairman – policy has improved massively since Carney replaced King.
Todd Kreider
Sep 30 2018 at 2:38pm
I sometimes follow Posen since he comments on Japan but why would he have been on the Monetary Policy Committee of the BoE with a PhD in government not economics? It’s an interesting difference from the U.S.
Scott Sumner
Sep 30 2018 at 6:30pm
Salem, As I said, it is not easy to empirically establish the superiority of any one approach, there’s lots of noise in the system.
Todd, He’s done important research on monetary economics, particularly inflation targeting.
Todd Kreider
Oct 1 2018 at 8:21am
OK. I knew Posen coauthored a paper in 1999 with Ben Bernanke and see on wiki that he coauthored that paper with Bernanke and two other PhD economists but his work has been qualitative political economy related. I assumed to be on the Fed or the U.K. version you needed a more technical background so found his placement interesting.
Benjamin Cole
Sep 30 2018 at 11:07pm
“A good start would have the Fed announce a willingness to buy unlimited NGDP futures at a price implying 3% growth and sell unlimited NGDP futures at a price implying 5% NGDP growth.—Scott Sumner.
I have always liked this idea. Maybe I would quibble for a 5% to 6% NGDPLT band.
Query: How much buying and selling of futures is anticipated, particularly in “bad ” times? Billions or trillions? I don’t mind trillions; after all the Fed QE program was in the trillions. The Bank of Japan has no problem with trillions.
If trillions of dollars are required, does the Fed print the money? Or does the Fed buy bonds, place reserves in banks, and then buy the futures contracts?
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