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Evolution of Monetary Policymaking

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, La Costa
Hosted By: Econometric Society
  • Chair: Ulrike Malmendier, University of California-Berkeley

Taking the Fed at Its Word: Direct Estimation of Central Bank Objectives Using Text Analytics

Adam Shapiro
,
Federal Reserve Bank of San Francisco
Daniel J. Wilson
,
Federal Reserve Bank of San Francisco

Abstract

There is an extensive literature that studies optimal monetary policy with an assumed central bank loss function, yet there has been very little study of what central bank preferences are in practice. We directly estimate the Federal Open Market Committee's (FOMC) loss function, including the implicit inflation target, from the tone of the language used in FOMC transcripts, minutes, and members' speeches. Direct estimation is advantageous because it requires no knowledge of the underlying macroeconomic structure nor observation of central bank actions. We find that the FOMC had an implicit inflation target of approximately 1.5 percent on average over our baseline 2000 - 2013 sample period. We also find that the FOMC's loss depends strongly on output growth and stock market performance and less so on their perception of current slack.

What Do We Learn from Reading Every FOMC Transcript?

Olivier Coibion
,
University of Texas-Austin
Marc Dordal i Carreras
,
University of California-Berkeley
Yuriy Gorodnichenko
,
University of California-Berkeley
Cooper Howes
,
University of Texas-Austin

Abstract

We construct a novel dataset to analyze the how the beliefs, preferences, and objectives of individual FOMC participants aggregate into a single monetary policy stance. We manually analyze transcripts for all 268 FOMC meetings from 1966-1990 and for each participant capture: 1) their numerical policy preferences for money growth and the Federal Funds Rate, 2) the justifications (such as output, inflation, or financial markets) that they give for their preferences, 3) pressures exerted by external entities such as Congress or financial markets, and 4) the perceived consequences (in terms of output and inflation) of their policy choices. This detail allows for a much richer characterization of the Fed’s monetary policy rule; in the case of the Volcker disinflation in the early 1980s, for example, there is ample evidence that policymakers knew that their actions would result in significant increases in unemployment but felt that it was the necessary price to be paid for reducing inflation.

Perceived FOMC: The Making of Hawks, Doves and Swingers

Michael Bordo
,
Rutgers University
Klodiana Istrefi
,
Bank of France

Abstract

Narrative records in US newspapers reveal that about 70 percent of Federal Open Market Committee (FOMC) members who served during the last 55 years are perceived to have had persistent Policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived
as swingers, switching between types, or remained an unknown quantity to markets. What makes a member a hawk or a dove? What moulds those who change their tune? We highlight ideology by education and early life economic experiences of these members. The Hawk/Dove composition of the FOMC
also matters for monetary policy as do the determinants that we isolate. They help explain déviations of the Federal Funds Rate from a forward–looking Taylor rule. This result has implications for the
political economy of FOMC appointments. This research is based on an original dataset.

The Making of Hawks and Doves

Ulrike Malmendier
,
University of California-Berkeley
Stefan Nagel
,
University of Chicago
Zhen Yan
,
University of Michigan

Abstract

We argue that central bankers’ personal inflation experiences significantly alter their inflation forecasts, votes, and speeches. First, we show that inflation experiences have a direct impact on Federal Open Market Committee members’ inflation forecasts in their semi-annual Monetary Policy Reports to U.S. Congress. Second, members with higher inflation experiences are significantly more likely to cast a hawkish dissent. Over the FOMC’s voting history since March 1951, an increase in a member’s experience-based inflation forecast by one within-meeting standard deviation raises the probability of a hawkish dissent by about one third, and decreases the probability of a dovish dissent also by about one third. Third, higher inflation experiences also predict a significantly more hawkish tone in speeches. Finally, aggregating over all FOMC members present at a meeting, the average experience-based forecast helps predict the federal funds target rate, over and above conventional forward-looking Taylor rule components. Our findings indicate strong and long-lasting effects of personal inflation experiences even among monetary-policy experts, and point to the importance of FOMC members’ selection.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit