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

Abstract

Macroeconomic models of monetary policy assume that central bankers form rational beliefs based on all available data. We show that personal lifetime experiences significantly affect the forecasts and voting behavior of FOMC members. We link experience-based inflation expectations to the desired level of nominal interest rates using a forward-looking formulation of the Taylor rule. We test the predicted relationship on data of the FOMC voting history from March 1951 to January 2014. We find that a one standard-deviation increase in experience-based forecasts increases the unconditional probability of a hawkish dissent also by about one third, and decreases the unconditional probability of a dovish dissent by about one third. Our results are robust to accounting for the different voting patterns of regional presidents and governors by allowing the thresholds for dissent to vary between groups as well as by other characteristics. We also find a strong direct impact of experiences on forecasts. The difference between FOMC and staff members' inflation forecasts is strongly related to their difference in lifetime experiences of inflation. Our findings imply that personal experiences affect even experts' expectation formation.