Voting Rights, Behavior of Federal Reserve Bank Presidents and Financial Market Reaction: Evidence from a Natural Experiment

We use a natural experiment at the U.S. Federal Open Market Committee to study how having or not having the right to vote affects behavior in a committee decision-making process, both during meetings and in between meetings.

In any given year, whether a Fed Bank president is an FOMC participant without the right to vote or a member with the right to vote is determined by a mechanical, yearly rotation scheme dating back to the early 1940s.

We find no evidence for a hypothesis maintaining that without the voting right, presidents use their public speeches and their meeting statements to compensate for this loss; instead, the data support the hypothesis that with the voting right, presidents are more involved. Financial markets react less to presidents’ public speeches in years they have voting rights than in years they have not. We argue that this is consistent with observed behavior of presidents.

joint work by Michael Ehrmann, Robin Tietz and Bauke Visser