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In: Economics

The Federal Reserve System operates under a seven-member Board of Governors. The term of a governor...

The Federal Reserve System operates under a seven-member Board of Governors. The term of a governor is fourteen years, and governors usually cannot serve more than one term (except for an additional partial term to fill a vacancy). Terms are staggered, so that one governor’s term expires every other year. Governors can only be removed from office “for cause”—that is, for abuse of their office and not just for policy disagreements. In what way do the long terms and secure tenure of Federal Reserve governors help to overcome the problem of time-inconsistency in monetary policy? In practice, Fed governors rarely serve out their full fourteen-year term. Is that a problem? Discuss.

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Expert Solution

In what way do the long terms and secure tenure of Federal Reserve governors help to overcome the problem of time-inconsistency in monetary policy?

For any bureaucrat to work, security of tenure is very important. If tenure is unsure then policy making and implementation becomes difficult. It is also important in this case as change in monetary policy takes time to show effects and hence to ensure governors accountable for their actions there has to be a proper time allowed. Generally any monetary policy change shows effects in 3-5 years and looking at it along with status of an economy further action can be taken. This whole process keeps on impacting inflation, unemployment and real GDP. Therefore to check effectiveness and efficiency of policies tome should be allowed.

In practice, Fed governors rarely serve out their full fourteen-year term. Is that a problem? Discuss.

History does not show that Fed governors not serving full terms creates a problem. As discussed earlier, 5-7 years are sufficient to show effects of any policy. Presidents change periodically,it may happen that there is dissent with policies and expectations of govt. and tenure is cut short voluntarily by a governor. In my opinion 14 years is too long a time to be in a office that has a very dynamic changes involved. As terms are staggered, a team is made. If more members of a team go out, old people may find it difficult to cope up with new team.


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