Working Paper: CEPR ID: DP14938
Authors: Ulrike M. Malmendier; Stefan Nagel; Zhen Yan
Abstract: 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.
Keywords: monetary policy; experience effects; availability bias; inflation forecasts; federal funds rate
JEL Codes: E50; E03; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal inflation experiences (E31) | beliefs about future inflation (E31) |
| beliefs about future inflation (E31) | voting decisions (D72) |
| personal inflation experiences (E31) | monetary policy stances (E63) |
| tone of speeches (D72) | experience-based inflation forecast (E37) |
| average inflation experiences (E31) | federal funds rate target (E52) |