The Making of Hawks and Doves: Inflation Experiences on the FOMC

Abstract

We show that personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members' FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.

Personal Experiences and Expectations about Aggregate Outcomes

“…Recent work explores empirical measures of expectations to inform the modeling of the expectation formation process (see Barberis et al., ; Fuster, Laibson, and Mendel, ). This work shows that personal experiences have a substantial effect on expectations of aggregate economic outcomes (see, e.g., Malmendier and Nagel, , ; Malmendier, Nagel, and Yan, ). Little is known, however, about what exactly constitutes the relevant set of “personal experiences.” For instance, local house price movements can differ substantially across the United States .…”

A Survey of the International Evidence and Lessons Learned About Unconventional Monetary Policies: Is a ‘New Normal’ in Our Future?

“…(, forthcoming), Malmendier et al . () and Meade et al . () are examples of studies that apply different algorithms and techniques to quantify the content of central bank policy statements, minutes, speeches and other central bank written publications.…”

“…There are a few important elements of these countries' UMP that are missing in some of the studies used to construct Figure 2, namely, a role for central bank communication. Hansen et al (2014), Acosta and Meade (2015), Bennani (2015), Lombardi et al (2017, forthcoming), Malmendier et al (2017) and Meade et al (2015) are examples of studies that apply different algorithms and techniques to quantify the content of central bank policy statements, minutes, speeches and other central bank written publications. These studies explore the impact of written communications on anything from inflation expectations to the stance of monetary policy more generally.…”

Dimensionality and Disagreement: Asymptotic Belief Divergence in Response to Common Information

“…The point is not that central bankers and professional forecasters disagree, but that there is disagreement even within category (in which presumably there are similar information sets and objectives). Furthermore, economists rarely switch from hawks to doves (Malmendier et al, 2017). rationally be used to update beliefs in different ways depending on people's priors.…”

“…For example,Hirshleifer and Teoh (2003) document how the presentation of accounting information affects its interpretation, andMalmendier et al (2017) show that personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers, which is evidence that priors influence how FOMC members interpret the same information. SeeBenoît and Dubra (2019) for a thorough discussion of the literature.…”