Academic journal article Economic Inquiry

What's So Funny about Making Monetary Policy?

Academic journal article Economic Inquiry

What's So Funny about Making Monetary Policy?

Article excerpt

I. INTRODUCTION

In the United States, decisions about monetary policy are made during meetings of the Federal Open Market Committee (FOMC). Only the members of the FOMC and a small number of other people are allowed to attend these meetings, but verbatim transcripts of the meetings are eventually released to the public (Spencer 1996, 309-10). (1) These transcripts reveal that members of the FOMC make each other laugh while they make monetary policy. In the transcripts, a member's statement is sometimes followed by "[Laughter]" or a similar transcription of laughter. For example, in the transcript of a meeting held on February 3-4, 1994, a statement by FOMC member Edward W. Kelley Jr. was transcribed as follows.

MR. KELLEE I certainly wouldn't try to say that an inflationary surge is upon us or is inevitable. But as John Wayne used to say in his Indian movies, "There's dust on the horizon!" [Laughter]

As shown in this example, the transcripts only reveal so much about the laughter elicited by FOMC members. The transcripts do not reveal who laughed or how hard they laughed. Yet the transcripts do reveal that members of the FOMC elicit laughter while making monetary policy.

This elicitation of laughter by FOMC members has not received much attention from economists. Indeed, when a panel of economists and other experts discussed what would happen if a monetary policymaker ever tried to tell hilarious jokes to the general public (Mehrling et al. 2007, in an article entitled "What If the Leader of the Central Bank Told Hilarious Jokes and Did Card Tricks? A Panel of Experts"), none of the panelists recognized that monetary policymakers already say things that elicit expressions of hilarity, at least while meeting among themselves.

Economists have given some attention to the elicitation of laughter by FOMC members. After the 2007-2009 recession, Paul Krugman remarked on his blog that "[the transcripts of FOMC meetings in 2006] show a lot of laughter and an incredible amount of complacency, with people mainly worried about inflation rather than the coming recession" (Krugman 2012). Krugman preceded his remark with a sarcastic "Hahahaheehee !"

In his remark, Krugman suggests that members of the FOMC were too concerned about the threat of inflation and not concerned enough about the threat of recession. Given the severity of the recession that came in the next year, Krugman could be correct, but this article does not address whether the members of the FOMC should have been more or less concerned about certain threats in the year before the recent recession or in any other year. Instead, this article addresses whether--as Krugman seems to suggest--members elicit laughter because they are unconcerned or even complacent about threats to the economy.

The article studies whether there is any association between the number of laughs elicited by a member during a meeting, on one hand, and the member's expectations about the macroeconomy, on the other hand. The study finds that a member elicits more laughter if he or she expects higher inflation, other things being equal. On the basis of this finding, the article argues that a member may elicit laughter partly because he or she is seriously concerned about threats to the economy, especially the threat of inflation.

II. MODELAND DATA

A. Simple Model

The number of laughs elicited by a member of the FOMC during a meeting of the FOMC has not been studied before, so this study uses perhaps the simplest model for a panel of count data: a Poisson fixed-effects model with an exponential conditional mean function (Cameron and Trivedi 1998, 280). A Poisson model is simple but not implausible. If a member says a given number of things during a meeting, and if each thing that he or she says elicits laughter with a small probability, then, by the "law of rare events," the number of laughs elicited by the member during the meeting will approximately follow a Poisson distribution. …

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