Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly 'Open Market'
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Scott Sumner
Abstract
In recent decades there has been a worldwide shift toward market-oriented economic policies, sometimes termed 'neoliberalism’. In the policy arena this trend has been most apparent in the widespread move toward privatization and deregulation. And in the academic world there has been increased respect shown to free market ideologies, even to policy views that would once have been regarded as impractical. Surprisingly, monetary policy is one area that has been relatively unaffected by the neoliberal revolution. Not only have governments retained a monopoly on fiat money, but even some free market ideologues have been skeptical of proposals for laissez-faire monetary regimes. This paper will show that market forces can greatly improve the effectiveness of monetary policy.
I will argue that the Federal Open Market Committee (FOMC) should do no more than set the goals of monetary policy. Sumner (1989, 1995) and Dowd (1994) argued that the creative use of prediction markets for goal variables might allow central banks to more accurately target variables such as inflation. I will briefly review the literature on policy futures markets, examine Bernanke and Woodford’s (1997) critique of policies that “target the forecast”, and then suggest some improvements in previous reform proposals.
More importantly, I show that policy future markets can address some of the key weaknesses of orthodox macroeconomic theory and policy, particularly the lack of consensus over structural models. Under this sort of policy regime, open market operations would reflect the views of not merely 12 individuals, but rather the consensus opinion of all those who choose to engage in open market operations. Even an issue as basic as the optimal monetary instrument would no longer be determined by the monetary authority, instead, each individual participant in the policymaking process would choose their own policy indicator. I will also show that a universal FOMC can improve the effectiveness of monetary policy even if the average level of decision-making skills on the expanded FOMC is inferior to the average skill level of the current 12 members.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
- Frontiers Article
- 10.2202/1534-6013.1320
- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
- Quantifying the Effects of the Demographic Transition in Developing Economies
- Inflation, Prices, and Information in Competitive Search
- Contributions Article
- Inflation Inertia in Sticky Information Models
- Job Separation Under Uncertainty and the Wage Distribution
- A Closed Form Solution to the Ramsey Model
- Convergence and Stability in U.S. Employment Rates
- What Does the Solow Model Tell Us about Economic Growth?
- Consumption and Health
- Capital Maintenance versus Technology Adoption Under Embodied Technical Progress
- Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly 'Open Market'
- Does Inflation Grease the Wheels of the Labor Market?
- The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
- A Search-Theoretic Monetary Business Cycle Model with Capital Formation
- Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
- Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint
- Topics Article
- Contracts and Money Revisited
- On the Use of Substitutability as a Measure of Competition
- Can the AK Model Be Rescued? New Evidence from Unit Root Tests with Good Size and Power
- How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes
- Uncertainty and Debt-Maturity in Emerging Markets
- Quantitative Monetary Easing and Risk in Financial Asset Markets
- Using Investment Data to Assess the Importance of Price Mismeasurement
- Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003
- Long-Run Money Growth and the Liquidity Effect
- Differentiability of the Efficient Frontier when Commitment to Risk Sharing is Limited
- A Model of Veblenian Growth
- Human Capital Composition, R&D and the Increasing Role of Services
- The Allocation of Labor and Endogenous Search Decisions
- Bank Lending with Imperfect Competition and Spillover Effects
- Convergence Across Italian Regions and the Role of Technological Catch-Up
