Prof. Mitchel Y. Abolafia Offers Further Remarks on Central Bank Transparency


By m2e |
April 22, 2013

Mitchel Y. Abolafia is a Professor at the Rockefeller College of Public Affairs and Policy, University at Albany/ SUNY. He has also taught at Sloan School of Management at MIT, Johnson School of Management at Cornell, and the School of Management, University of California at Davis. He holds a BA in Sociology from Tufts University, and a Ph.d in Sociology from Stony Brook University. Professor Abolafia is currently working on a book about decision making at the Federal Reserve titled “Interpreting the Economy: Power and Practice at the Federal Reserve.” It offers an inside look at how senior policy makers at the Fed control the supply of money and credit to the economy. These policy makers are inundated by a continuous flow of complex and ambiguous information about the economy. The books uncovers the interpretative process of the Federal Open Market Committee, explaining how this group makes sense of the data, negotiates a consensual policy and frames that policy for investors, traders, and corporations around the world. Data are drawn from verbatim transcripts of the meetings of the Federal Open Market Committee as well as other archival documents.

On April 15th, 2013, Dr. Mitchel Y. Abolafia visited USC Annenberg, and presented his work at an M{2e} Research Seminar on 'Media, Money, and Society'. Afterwards, Flemming Rhode, a second-year doctoral student in the USC Annenberg School of Communication, spoke w/Prof. Abolafia about recent policy trends at the Fed.

Q: The level of Federal Reserve transparency has been a significant question during Ben Bernanke's tenure as Chairman of the Federal Reserve. He has held press conferences after decisions to change the interest rate as well as setting numeric inflation targets. However, he has also strongly opposed the Federal Reserve Transparency Act which received rare bipartisan support in the House of Representatives and was picked up by Bernie Sanders in the Senate, but now sits in committee under outgoing chairman Tim Johnson. Is the threat of a more extensive audit of the Federal Reserve related to the increasing transparency which would obviate the need for the more radical bill curtailing the Federal Reserve's independence?

A: The kind of transparency that the Fed has in mind is an order of magnitude less than the transparency contemplated by the Transparency Act. This question speaks to the paradox I addressed in my talk.  From a democratic point of view, you would expect that more transparency is always a good thing.  But policy makers, especially central bankers, must, on occasion,  do things that are unpopular, such as raising interest rates, loaning money to banks  etc.  There is some reason to fear that the banks wouldn't borrow and the central bankers would wait too long to fight incipient inflation if central bank policy making were fully transparent.  So on this one. I side with the Fed. I frankly fear that Ron Paul's intention is to end the Fed, rather than make it more effective. This is a singularly bad idea. Central banks reduce the amount of volatility in the economy, something from which we all benefit.

Q: Your data sets seem to support the notion that during the late 1980s and early 1990s the Federal Reserve was concerned with curbing inflation and how to counteract congressional legislative efforts designed to address unemployment. Today the Federal Reserve's forward guidance and quantitative easing programs combined with congressional austerity suggests this has reversed. If you agree this reversal is real, is it temporary and is the Federal Reserve's credibility intrinsically tied to its ability to counteract Congress?

A: I'm not sure they tried to counteract Congress very much, but they certainly were deeply concerned about inflation.  Today they are properly concerned about growth.  It is not that they are trying to counteract Congress but rather that they operate counter-cyclicly. The job of a central bank is to "lean against the wind."   In periods of growth they are vigilant about inflation, in periods of recession and high unemployment they are concerned about growth.   This is a reflection of the fact that our central bank, as opposed to most other major central banks, has a dual mandate to balance these concerns. The European Central Bank does not have this mandate, a fact that is not serving them well right now.

Q: Ben Bernanke has been chairman of the Federal Reserve during a time of crisis, being roundly criticized by both the political left and right threatening his chances of another tenure as chairman. Is this controversy chiefly caused by a global financial crisis out of his reach, or has he failed to harvest the necessary credibility or was there none to harvest? In other words, does your model of Federal Reserve communications suggest alternative strategies that could have been employed by the Federal Reserve?

A: Historically, the Fed has always been a target of both the left and the right. The right believes the market can regulate itself, without government intervention and the left feels that the intervention is too biased toward the interests of the wealthy, especially banks. The financial crisis has discredited the former argument and strengthened the latter. But of all the institutions that responded to the financial crisis, the Fed will be remembered as the most innovative and probably the most activist.  They were a little slow to pick up on the systemic effects of the failure in mortgage-backed securities in 2007 and 2008, but once they did they found ways to intervene in the markets that were creative and effective.  The markets know this, although some political groups, such as the Tea Party, may not understand it.

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