The origins of monetary policy disagreement: the role of supply and demand shocks

BIS Working Papers  |  No 1118  | 
30 August 2023



Central bank decisions are often taken by a committee or board rather than an individual. Some policy decisions are made after meetings with dissent votes. Which factors or shocks drive disagreement among the committee members voting on monetary policy? How can the central bank mandate, whether it be a single mandate for inflation or a dual goal of low inflation and maximum employment, explain disagreement?


We present a theoretical model of committee voting on interest rates for an economy experiencing two types of shocks: supply and demand. Under a dual mandate in which members differ in their preferences for combating inflation versus minimising unemployment, the model shows that supply shocks increase dissent substantially more than demand shocks do. The reason is that supply shocks imply a trade-off between inflation and output (or unemployment) stabilisation, therefore increasing disagreement between "hawks" and "doves". We show whether this simple model fits the data by looking at the monetary policy decisions taken by the Federal Reserve Board between 1957 and 2018.


We find that supply shocks drive disagreement in the monetary policy meetings in the United States. In turn, demand shocks are associated with less disagreement. For instance, the 1970s and early 1980s saw frequent dissent votes, which coincided with several supply-related events such as oil shocks. The 1990s and early 2000s were decades with stronger demand shocks, which explains the less frequent dissent during the Greenspan years. Supply shocks increase all types of disagreement, whether in terms of members preferring tighter policies against inflation ("hawks"), easier policies ("doves") or for other reasons. Demand shocks reduce disagreement relative to the baseline. Finally, we show that this pattern of supply shocks causing disagreement is not seen at the Bank of England, which has a single mandate for minimising inflation.


We investigate how dissent in the FOMC is affected by structural macroeconomic shocks obtained using a medium-scale DSGE model. We find that dissent is less (more) frequent when demand (supply) shocks are the predominant source of inflation fluctuations. In addition, supply shocks are found to raise private sector forecasting uncertainty about the path of interest rates. Since supply shocks impose a trade-off between inflation and output stabilisation while demand shocks do not, our findings are consistent with heterogeneous preferences over the dual mandate among FOMC members as a driver of policy disagreement.

JEL classification:  E52, E58, D78

Keywords: FOMC, committees, monetary policy, structural shocks, dissent