Implications of Dynamic Decision Making Research on Monetary Policy Making at the Federal Reserve

Study of Dynamic Decision Making (DDM) has been devoted to understanding the behaviors of decision makers facing dynamic decision making tasks. DDM involves decision tasks embedded in complex systems, the structure of which is not fully known to the decision makers. Previous DDM research mainly took an experimental approach, attempting to explain how people make dynamic decisions and how to improve DDM outcomes. This study examined implications of the laboratory findings on a real DDM case: decision making behavior of monetary policy makers at the Federal Reserve. DDM theories were used as a framework to understand the monetary decision making behavior. From analysis of the Federal Open Market Committee (FOMC) meeting transcripts, this study suggests that policy makers face a difficult decision making environment that many DDM studies have associated with negative task performance, but unlike typical decision makers described in the DDM literatures, the FOMC members develop ways to tackle the difficulties. Observation of the FOMC decision making behavior suggests decision makers in the real world may be more competent than expected by the DDM theories. Based on the findings, this article also proposes new topics for future DDM study.