Archive for September 16th, 2014

Do Regional Fed members have a regional bias?

September 16, 2014

The question is kind of tautological. I mean what good are regional Fed members if they do not bring regional angle to the table. After all that is their role.

The issue is whether their voting pattern for interest rates is based on regional understanding or not. Ideally, one would think that monetary policy should be based on the national economy and not on regional basis.

This paper by ECB econs Alexander Jung and Sophia Latsos look at the issue:

In a federal central banking system there is an undisputed need for a regional dimension to monetary policy decision-making. In fact, the literature suggests that monetary policy-makers, who are part of such a system, should use a wide range of indicators when assessing economic and financial conditions. Therefore, it appears warranted if these policy-makers choose to monitor regional data in order to enhance their understanding of national economic dynamics. At the same time, monetary theory cautions that policy-makers should avoid voting in a manner that would favour their region of origin. Such voting behaviour may reflect a regional bias in the interest rate preferences of policymakers and could lead to suboptimal monetary policy outcom econometric strategies, these studies mostly find evidence in favour of the existence of some form of regional bias in policy-makers’ deliberations on interest rates. However, two important questions remain unresolved: do previous findings represent robust evidence that policy-makers’ preferences are subject to a regional bias, and, if so, to what extent does the possible presence of a bias influence monetary policy decisions?

They estimate Taylor rules for each of the regions and check that with interest rate preferences to figure the regional bias. Some Regional Feds did have regional bias but that did not overall affect the mon pol decision:

In order to detect a regional bias in policy-makers’ interest rate preferences, it is necessary to apply specific empirical methods. In this sense, the evidence detecting such biased preferences has to be twofold. First, it has to show that a policy-maker’s interest rate preference responds to regional data stemming from the respective home district. Second, the preference also has to be such that a policymaker would favour the regional economy in his or her decision on the (national) interest rate. For example, a Federal Reserve Bank President with a regional bias would opt for lower (higher) interest rates when his or her region’s unemployment rate was higher (lower) than the national average. The empirical approach to the hypothesis of a regional bias thus requires estimating policy-makers’ reaction functions and augmenting them with a regional variable. The evidence obtained from this has to show that the regional variables of the policy-makers’ respective home districts explain why their interest rate preference deviates from the FOMC’s federal funds rate.

By estimating individual Taylor rules for FOMC members, we examine the interest rate preferences of the Federal Reserve Bank Presidents during the Greenspan era (sample 1989 to 2006). In order to evaluate the regional bias hypothesis, we augment individual Taylor rules for the Federal Reserve Bank Presidents with regional variables and test for their influence on the Presidents’ preferences. Information on individual interest rate preferences stems from FOMC transcripts. Estimates based on these augmented Taylor rules reveal that the preferences of some Federal Reserve Bank Presidents were not free of a regional bias, a result that applies particularly to the smaller districts. 

However, Taylor rules with inertia show that this finding could also be due to the presence of an interest rate smoothing motive. Moreover, further tests confirm previous results by Chappell et al. (2008) who found that compared to the nationwide unemployment rate the district unemployment rate only has a small (negative) impact on FOMC members’ interest rate preferences. Overall, our findings support the view that the presence of a regional bias in the interest rate preferences of some Federal Reserve Bank Presidents is unlikely to have impeded on the Fed’s capacity to set interest rates with a nationwide focus.

Interesting stuff. We shall have some research on ECB as well when the minutes etc are published from next year onwards.

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Regulating managerial pays in Banks..(Should variable pays of private sector bank chiefs be cut?)

September 16, 2014

Prof TT Rammohan of IIMA reviews the various laws which have come to curb salaries etc of bankers (also called as banksters).

There are two broad approaches to regulating bank salaries — One from Europe and other from US/UK (we call anything from these two as global solutions):

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Astonishing Story of how Federal Reserve reacted on 9-11…

September 16, 2014

The US just celebrated its anniversary of the terrorist attacks.

Arliss Bunny writes this stirring account of how Fed reacted during the attacks:

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Framing to nudge Scots choose independence over non-independence?

September 16, 2014

Enormous amount of discussions on the Scot independence issue. We will get to know on 18 Sep.

Mark Gilbert of Bloomberg says the framing of the referendum question has given it away. It is a nudge to choose independence over non-independence:

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