IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/23228.html
   My bibliography  Save this paper

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

Author

Listed:
  • Ulrike Malmendier
  • Stefan Nagel
  • Zhen Yan

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.

Suggested Citation

  • Ulrike Malmendier & Stefan Nagel & Zhen Yan, 2017. "The Making of Hawks and Doves: Inflation Experiences on the FOMC," NBER Working Papers 23228, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23228
    Note: AP EFG ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w23228.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stephen Hansen & Michael McMahon, 2016. "First Impressions Matter: Signalling as a Source of Policy Dynamics," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1645-1672.
    2. Giorgio E. Primiceri, 2006. "Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 867-901.
    3. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126, National Bureau of Economic Research, Inc.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    5. David Romer, 2010. "A New Data Set on Monetary Policy: The Economic Forecasts of Individual Members of the FOMC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 951-957, August.
    6. Markku Kaustia & Samuli Knüpfer, 2008. "Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions," Journal of Finance, American Finance Association, vol. 63(6), pages 2679-2702, December.
    7. Peter Koudijs & Hans-Joachim Voth, 2016. "Leverage and Beliefs: Personal Experience and Risk-Taking in Margin Lending," American Economic Review, American Economic Association, vol. 106(11), pages 3367-3400, November.
    8. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    9. Hansen, Stephen & McMahon, Michael, 2016. "Shocking language: Understanding the macroeconomic effects of central bank communication," Journal of International Economics, Elsevier, vol. 99(S1), pages 114-133.
    10. Olivier Coibion & Yuriy Gorodnichenko, 2012. "Why Are Target Interest Rate Changes So Persistent?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 126-162, October.
    11. Henry W. Chappell & Thomas M. Havrilesky & Rob Roy McGregor, 1993. "Partisan Monetary Policies: Presidential Influence Through the Power of Appointment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 185-218.
    12. Greenwood, Robin & Nagel, Stefan, 2009. "Inexperienced investors and bubbles," Journal of Financial Economics, Elsevier, vol. 93(2), pages 239-258, August.
    13. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    14. Anne Sibert, 2006. "Central Banking by Committee," International Finance, Wiley Blackwell, vol. 9(2), pages 145-168, August.
    15. Mishkin, Frederic S., 2010. "Monetary policy flexibility, risk management, and financial disruptions," Journal of Asian Economics, Elsevier, vol. 21(3), pages 242-246, June.
    16. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
    17. Christina D. Romer & David H. Romer, 2004. "Choosing the Federal Reserve Chair: Lessons from History," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 129-162, Winter.
    18. Ricardo Reis, 2013. "Central Bank Design," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 17-44, Fall.
    19. EllenE. Meade & David Stasavage, 2008. "Publicity of Debate and the Incentive to Dissent: Evidence from the US Federal Reserve," Economic Journal, Royal Economic Society, vol. 118(528), pages 695-717, April.
    20. Yao-Min Chiang & David Hirshleifer & Yiming Qian & Ann E. Sherman, 2011. "Do Investors Learn from Experience? Evidence from Frequent IPO Investors," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1560-1589.
    21. Timothy Cogley & Thomas J. Sargent, 2005. "The conquest of US inflation: Learning and robustness to model uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 528-563, April.
    22. Christina D. Romer & David H. Romer, 2008. "The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?," American Economic Review, American Economic Association, vol. 98(2), pages 230-235, May.
    23. Ulrike Malmendier & Stefan Nagel, 2016. "Learning from Inflation Experiences," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 53-87.
    24. Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-233, July.
    25. Henry W. Chappell Jr. & Rob Roy McGregor, 2000. "A Long History of FOMC Voting Behavior," Southern Economic Journal, John Wiley & Sons, vol. 66(4), pages 906-922, April.
    26. Yash P. Mehra & Bansi Sawhney, 2010. "Inflation measure, Taylor rules, and the Greenspan-Bernanke years," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(2Q), pages 123-151.
    27. Apel Mikael & Grimaldi Marianna Blix, 2014. "How Informative Are Central Bank Minutes?," Review of Economics, De Gruyter, vol. 65(1), pages 53-76, April.
    28. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    29. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
    30. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    31. Henry W. Chappell, Jr. & Rob Roy McGregor & Todd A. Vermilyea, 2005. "Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033305.
    32. Richard Williams, 2006. "Generalized ordered logit/partial proportional odds models for ordinal dependent variables," Stata Journal, StataCorp LP, vol. 6(1), pages 58-82, March.
    33. Ulrike Malmendier & Geoffrey Tate & Jon Yan, 2011. "Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies," Journal of Finance, American Finance Association, vol. 66(5), pages 1687-1733, October.
    34. Chappell, Henry Jr. & Havrilesky, Thomas M. & McGregor, Rob Roy, 1995. "Policymakers, institutions, and central bank decisions," Journal of Economics and Business, Elsevier, vol. 47(2), pages 113-136, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jonas Hjort & Diana Moreira & Gautam Rao & Juan Francisco Santini, 2021. "How Research Affects Policy: Experimental Evidence from 2,150 Brazilian Municipalities," American Economic Review, American Economic Association, vol. 111(5), pages 1442-1480, May.
    2. Hamza Bennani & Tobias Kranz & Matthias Neuenkirch, 2017. "Disagreement Between the FOMC and the Fed's Staff: New Insights Based on a Counterfactual Interest Rate," Research Papers in Economics 2017-10, University of Trier, Department of Economics.
    3. Florian Heiss & Michael Hurd & Maarten van Rooij & Tobias Rossmann & Joachim Winter, 2019. "Dynamics and heterogeneity of subjective stock market expectations," DNB Working Papers 640, Netherlands Central Bank, Research Department.
    4. Guido Schultefrankenfeld, 2020. "Appropriate monetary policy and forecast disagreement at the FOMC," Empirical Economics, Springer, vol. 58(1), pages 223-255, January.
    5. Malmendier, Ulrike & Szeidl, Adam, 2020. "Fishing for fools," Games and Economic Behavior, Elsevier, vol. 122(C), pages 105-129.
    6. Monnet, Eric & Puy, Damien, 2020. "Do old habits die hard? Central banks and the Bretton Woods gold puzzle," Journal of International Economics, Elsevier, vol. 127(C).
    7. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. Eichengreen, Barry & Mari, Rebecca & Thwaites, Gregory, 2018. "Will Brexit Age Well? Cohorts, Seasoning and the Age-Leave Gradient, Past, Present and Future," CEPR Discussion Papers 13288, C.E.P.R. Discussion Papers.
    9. Michael D. Bordo & Klodiana Istrefi, 2018. "Perceived FOMC: The Making of Hawks, Doves and Swingers," NBER Working Papers 24650, National Bureau of Economic Research, Inc.
    10. Armelius, Hanna & Bertsch, Christoph & Hull, Isaiah & Zhang, Xin, 2020. "Spread the Word: International spillovers from central bank communication," Journal of International Money and Finance, Elsevier, vol. 103(C).
    11. Farvaque, Etienne & Malan, Franck & Stanek, Piotr, 2020. "Misplaced childhood: When recession children grow up as central bankers," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    12. Ehrmann, Michael & Tietz, Robin & Visser, Bauke, 2021. "Voting right rotation, behavior of committee members and financial market reactions: evidence from the U.S. Federal Open Market Committee," Working Paper Series 2569, European Central Bank.
    13. M. Rozina & М. Розина, 2019. "Теория и практика поведенческой экономики в процессе принятия финансовых решений // The Use of Theory and Methods of Behavioural Economics in the Process of Making Financial Decisions," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 7(3), pages 45-82.
    14. Rossmann, Tobias, 2019. "Economic Uncertainty and Subjective Inflation Expectations," Rationality and Competition Discussion Paper Series 160, CRC TRR 190 Rationality and Competition.
    15. Donato Masciandaro & Paola Profeta & Davide Romelli, 2020. "Do Women Matter in Monetary Policy Boards?," BAFFI CAREFIN Working Papers 20148, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    16. Apel, Mikael & Blix Grimaldi, Marianna & Hull, Isaiah, 2019. "How Much Information Do Monetary Policy Committees Disclose? Evidence from the FOMC's Minutes and Transcripts," Working Paper Series 381, Sveriges Riksbank (Central Bank of Sweden).
    17. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    18. Rossmann, Tobias, 2019. "Does Experience Shape Subjective Expectations?," Rationality and Competition Discussion Paper Series 181, CRC TRR 190 Rationality and Competition.
    19. Jessica A. Wachter & Michael Jacob Kahana, 2019. "A Retrieved-Context Theory Of Financial Decisions," NBER Working Papers 26200, National Bureau of Economic Research, Inc.
    20. Beckworth, David, 2017. "Permanent versus temporary monetary base Injections: Implications for past and future Fed Policy," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 110-126.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Malmendier, Ulrike & Nagel, Stefan & Yan, Zhen, 2021. "The making of hawks and doves," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 19-42.
    2. El-Shagi, Makram & Jung, Alexander, 2015. "Does the Greenspan era provide evidence on leadership in the FOMC?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 173-190.
    3. Ellis, Michael A. & Liu, Dandan, 2013. "Do FOMC forecasts add value to staff forecasts?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 332-340.
    4. Hamza Bennani, 2016. "Measuring Monetary Policy Stress for Fed District Representatives," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 156-176, May.
    5. Smales, Lee A. & Apergis, Nick, 2016. "The influence of FOMC member characteristics on the monetary policy decision-making process," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 216-231.
    6. Stefan Eichler & Tom Lähner, 2014. "Forecast dispersion, dissenting votes, and monetary policy preferences of FOMC members: the role of individual career characteristics and political aspects," Public Choice, Springer, vol. 160(3), pages 429-453, September.
    7. Jung, Alexander & Latsos, Sophia, 2015. "Do federal reserve bank presidents have a regional bias?," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 173-183.
    8. Pao‐Lin Tien & Tara M. Sinclair & Edward N. Gamber, 2021. "Do Fed Forecast Errors Matter?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(3), pages 686-712, June.
    9. Klodiana Istrefi, 2019. "In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy," Working papers 725, Banque de France.
    10. Kevin Lee & James Morley & Kalvinder Shields, 2015. "The Meta Taylor Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 73-98, February.
    11. Dalton, Michael & Landry, Peter, 2020. "‘Overattention’ to first-hand experience in hiring decisions: Evidence from professional basketball," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 98-113.
    12. Guido Schultefrankenfeld, 2020. "Appropriate monetary policy and forecast disagreement at the FOMC," Empirical Economics, Springer, vol. 58(1), pages 223-255, January.
    13. Eichler, Stefan & Lähner, Tom & Noth, Felix, 2016. "Regional Banking Instability and FOMC Voting," IWH Discussion Papers 15/2016, Halle Institute for Economic Research (IWH).
    14. Hubert, Paul & Labondance, Fabien, 2021. "The signaling effects of central bank tone," European Economic Review, Elsevier, vol. 133(C).
    15. Peiran Jiao, 2015. "The Double-Channeled Effects of Experience on Individual Investment Decisions: Experimental Evidence," Economics Series Working Papers 766, University of Oxford, Department of Economics.
    16. Mark Harris & Paul Levine & Christopher Spencer, 2011. "A decade of dissent: explaining the dissent voting behavior of Bank of England MPC members," Public Choice, Springer, vol. 146(3), pages 413-442, March.
    17. Lähner, Tom, 2015. "Inconsistent voting behavior in the FOMC," Hannover Economic Papers (HEP) dp-546, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    18. Chernenko, Sergey & Hanson, Samuel G. & Sunderam, Adi, 2016. "Who neglects risk? Investor experience and the credit boom," Journal of Financial Economics, Elsevier, vol. 122(2), pages 248-269.
    19. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.
    20. Chan, Kalok & Wang, Baolian & Yang, Zhishu, 2019. "Why investors do not buy cheaper securities: Evidence from a natural experiment," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 59-76.

    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:23228. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.