Haas Newsroom




UC Berkeley Study Suggests The Role of Chief Economist May Be Inflated



BERKELEY, Calif. - Before becoming chairman of the Federal Reserve, Ben Bernanke said it was a “top priority” to “maintain continuity” with Alan Greenspan’s leadership.  However, a new UC Berkeley study questions the power structure of the Federal Reserve and determines a single, powerful leader may not be the wisest way to create sound economic policy.

Recently published in the American Economic Review, “Do Monetary Policy Committees Need Leaders? A report on an Experiment” examines whether designated leaders of monetary policy committees make a difference. Haas School of Business Professor John Morgan, Gary & Sherron Kalbach Chair in Business Administration and a member of the Haas Economic Analysis and Policy Group, co-authored the paper with Alan S. Blinder, an economics professor at Princeton University. Their collaboration resulted in a surprising finding: “Groups without such leaders do as well as or better than groups with well-defined leaders,” the paper concludes.

The research subject first arose during a Princeton cocktail party ten years ago. Morgan and Blinder conversed and wanted to know if the Federal Reserve’s “will of the maestro” approach is the right way to determine monetary policy. This new paper builds upon their 2005 findings by focusing on the size and leadership of policy committees. Morgan says “Our results indicate a loosely led group may be the right strategy.”

Morgan used the Xlab, an experimental social science laboratory at Haas, to conduct the four-month experiment. Morgan is the founding director of the Xlab. He recruited 200 undergraduate students who had taken at least one course in macroeconomics. First he studied committee size. Students were assigned to groups of four or eight, then given macroeconomic equations for inflation and unemployment, both resembling the US economy.  Their job:  pretend to be real-world central bankers and control the nominal interest rate. “The situation becomes very real when subjects are put in charge of monetary policy decisions, “says Morgan. 

The experiment then introduced a realistic “shock” to aggregate demand. Morgan studied how quickly the groups hit inflation and unemployment targets by raising or lowering the nominal interest rate.  Raising the rate lowers inflation and raises unemployment; lowering the rate does the reverse.  The larger groups barely outperformed the smaller groups. The lab scored the quality of each student’s performance and the person with the highest score became the designated leader of the group.

In subsequent experiments, Morgan and Blinder found while individual leaders worked just as fast as a group and more accurately, the groups, as a whole, emerged stronger. Morgan says, “There’s a sort of magic to the group and it made better decisions systematically than the lone wolf decision maker model many Feds used for years.” Furthermore, groups with designated leaders did not produce results superior to those who did not have a leader.

The paper raises questions about the “strong leader” model of the Federal Reserve and its formal chairman. Morgan contemplates whether organic, more collegial leadership may be more effective. “Maybe the Senate’s line of questioning for (Ben) Bernanke and future chairmen shouldn’t be so much about the intellective criteria but other criteria that facilitate group interaction,” Morgan says. He adds, “Our results suggest that the European bank model of seeking compromise and consensus can, in fact, be highly performing.”


Pamela Tom
Marketing & Communications
Haas School of Business
University of California, Berkeley