Does lifetime experience influence FOMC votes?

There is a new paper by Malmandier, Nagel, and Yan (pdf) on that question, it seems the answer is yes, here is the abstract:

We show that personal lifetime experiences of inflation significantly affect the hawkish or dovish leanings of central bankers. We link experience-based inflation expectations to the desired level of nominal interest rates using a forward-looking formulation of the Taylor rule. Using data of the FOMC voting history from March 1951 to January 2014, we estimate that a one standard-deviation increase in experience-based forecasts increases the unconditional probability of a hawkish dissent by about one third, and decreases the unconditional probability of a dovish dissent also by about one third. FOMC members also use significantly a more hawkish tone in their speeches if they have experienced high inflation in their lives so far. Aggregating over all FOMC members present at a meeting, we establish a significantly positive relationship between their average inflation experience and the Fed Funds Rate target decided at the meeting. Finally, inflation experiences have a strong direct impact on FOMC members’ inflation forecasts as reported in their semiannual Monetary Policy Reports to Congress, suggesting that experiences affect beliefs. Our findings imply that even professionals are affected by their lifetime experiences of macroeconomic outcomes and shed new light on the importance of FOMC appointments.

This is from their conclusion:

This evidence adds to a growing literature on the role of ‘experience effects’, a term first coined by Malmendier and Nagel (2011) in the context of stock-market investment. What is still debated is whether such influences are weaker among more highly educated decision-makers or even experts. Our results here suggest that this is not necessarily the case.

I would expect such effects to be stronger for the better-educated and the experts.  We are more a prisoner of our prisms, just as we are more likely to have strong prisms in the first place.


So experience of inflation makes you a priori dislike it more? But would that suggest naivety on the part of those who haven't or ... just that people dislike inflation more when they've seen more of it? We're not exactly talking about the kind of inflation where you insist on getting paid twice a day so you can spend your money before it loses even more value or to renegotiate wages for the afternoon depending on how bad today's monetary plunge has been.

Anyways, as for any potential salivation surrounding the idea of inflating away debts (this comes up from time to time), don't forget that the difference between real and nominal rates is a thing.

Also, for more extreme plausible scenarios than higher inflation, such as one day literally doubling the number of bills and thus reducing debt by half, it is worth noting that the future of American corporate profits and high value employment lies in access to international markets. Even entirely neglecting the economic value and influence associated with reserve currency status, it's hard to see how there's anything worthwhile down that line of thinking.

This is just silly. I could just as easily infer that being older makes you more hawkish. The correlation between being older and having experienced high inflation in your lifetime is 1. And being older is itself correlated with lots of stuff. Did they check the correlation between number of grandchildren and hawkish votes? I bet it is very high.

Why is your comment silly? It's consistent with the paper's conclusion, and probably if you did a study you would indeed find older people are more hawkish on inflation. To me, what's interesting is that since the evidence shows money is largely short-term neutral (Bernanke et al, 2002 FAVAR paper, among others), the entire exercise of monetarism (a construct developed by David Hume with the quantity theory of money; btw do you also believe in transmutation, witches, humorism--seriously?--or spontaneous generation? No theory from back then is true today, so why should monetarism be?) is nothing more than being fooled by randomness. Thus the people that are drawn to monetarism seem to be those fascinated by the printing of money. By analogy, imagine if educators thought playing chess makes you significantly smarter, since they played chess and were smart (like TC is, like I am) and started making chess playing mandatory in schools. We are prisoners of our prisms, and see the light in different colors as colored by our bias.

"‘experience effects’, a term first coined by Malmendier and Nagel (2011)": golly, no one before 2011, in the whole history of the English language, had referred to ‘experience effects’ until a couple of economists used the blazingly obvious term. No doubt economists invented tiddly-winks too.

It could be useful to know in advance that any uses of this phrase prior to 2011 could not have fallen in the same literature.

Yes; to a certain effect, these people always think it's 1980, even though our current challenges are completely different

This is one of the most amusing things I've read yet. What they are studying is whether exposure to reality changes how one view economic models.

What we really need are inexperienced fresh out of school kids where the real world hasn't had the chance to sully their thought processes. Then give them unlimited power with no, absolutely no feedback mechanism of reality. Then we will hit utopia.

The real question here isn't ones preconceptions, but rather whether the mechanisms that create inflation are understood at all. How long does it take to demolish confidence that the currency you hold will be worth 12% less a year from now? How much is a stable, 2-3% inflation baked in to the vast numbers of assumptions, plans and investment strategies throughout the economy? In an inflationary environment you simply pass on the higher prices down the line and get paid nonetheless. In a non inflationary environment you can try, but the transaction doesn't occur. When that consensus in an economy is broken, what happens? Do we see gradual increases from 2-3% up to 4-5%, or do we see pent up price pressures where a 15% jump happens, which causes a cascading instability in the economy?

Remember that any levers have no effect for 18-24 months and your feedback is 6 months to a year old.

When all those who lived through the 70's and 80's are dead and gone then the new generation can go ahead and learn the exact same hard lessons. But this time there won't be any of the accumulated wealth and economic vibrancy that existed then, but an over regulated, over indebted stagnant economy. They will learn how indefensible those nice beach properties in the Hamptons really are.

No, what they are studying is whether even top top top top experts share this effect.

We never learn. It astounds me. There are still Marxists, too.

I sure wish that, until inflation is over 2%, including oil prices & tech price (with adjustment for quality improvements), that the US Treasury would order the printing of money to pay for budget deficits rather than more gov't debt -- starting with a big 20% of prior year's gov't budget deficit to be funded by actual printing of money.

Sort of a helicopter drop of "more money" on those who are already getting gov't payments.

I'd even go further and reduce taxes on middle class folk with increased money printing.

When the idea of "negative interest rates" is being seriously considered as a tool for central bankers, I think money printing to hit a higher inflation target is fully called for.

When does it stop? When inflation hits 2% or over ...

This is the hand washing paper in disguise.

It is all about how people respond to incentives that are no longer there.

There is no doubt that your life experiences will shape your decisions. And it's also true that some people are risk takers while others are cautious/conservative in their decisions. But most people who are successful are so because their particular predilection coincides with the reality on the ground at the time and not generally because the individual had great foresight and predicted the correct actions to take.

Those economists who experienced inflation after WWI gave us the Great Depression. Thank you very much. Those economists who experienced inflation after the Vietnam War gave us 18% interest rates, recurring bubbles, and financial crises. Thank you very much. What's needed for prosperity is to give all economists lobotomies. Thank you very much.

No trade legislators caused (worsened) the depression, and the oil shock(s) caused the second one. Neither of which can really be attributed to monetary policy, no matter that monetary policy was needed (?) to reduce the time needed to pick up the pieces.

Stop the presses! Where you stand is influenced by where you sit!

CEOs who own their own houses free and clear more commonly lead firms with less debt.

(Source: Harvard Business Review Daily Stat, June 11, 2012)

Firms led by Democrats more often obey civil rights, labor and environmental laws.

Firms led by Republicans more often obey securities and intellectual property laws.


"..experiences affect beliefs..." except for liberals... They never learn from experience.

We got to be very wise and careful with inflation, as it makes huge difference which is why we need to be extremely careful with how we go about doing things. Right now, I believe we need to just focus on the happening around Elections which is what will help us success. I trade with OctaFX broker where I get plenty of help and support coming with low spreads, high leverage, and bonuses and much more, it’s all truly awesome and love able for me.

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