Finance Weblog: Hawks and Doves - Instituto de Empresa Business School

These are very common words in the financial press since Central Banks gained independence. But what do they mean? A "Hawk" is a central banker who is a little more concerned with implementing monetary policy to fight inflation rather than to stimulate the economy. A "Hawk" has a bias towards higher rates whenever there are signs of overheating in the economy. A "Dove" believes in the stimulating properties of monetary policy and thinks that it is a relevant tool in keeping the economy growing. A “Dove” is afraid that interest rates rises implemented to keep the inflation on hold might affect negatively growth. Both players (the “Hawks” and the “Doves”) believe on the importance of monetary policy to restrain an inflation process and they both believe that monetary policy can be used further in case growth needs to be stimulated. But how much each of these policy goals weight in central bankers’ utility is what distinguish one from the other. Sometimes when central banker do not express openly and undisputedly their preferences, one has to dive into a cryptic language in Central Banks statement and bulletins to understand the hawkinesh/dovinesh of the statement. This is the job of Central Bank watchers. They have to interpret the language of policy makers. For instance, in the US Greg IP is supposed to be a good Fed watcher.

Some authors in order to measure the tone and stance of policy in the ECB have built a measurement of this: the Hawkometer. The hawkmometer is a numerical assessment on the stance of policy (dovish to hawkish). Daniel Gros describes the way this measure is done as an exercise of collecting from editorials text of the ECB phrases such as ‘upside risks to price stability’ (or very close substitutes to this expression) which represented a ‘hawkish’ statement, or ‘downside risks to activity’ (and close substitutes to this) which represented a ‘dovish’ statements. He then explains: “We counted the number of independent appearances of these statements in the editorial texts. For instance, if the economic and monetary analysis detected upside risks to price stability, we assigned the text a value of +2. If the ‘upside risks’ to price stability were not only summarised but re-emphasised in the summary section, we assigned the text a value of +3, etc. The same rating – with negative sign – was applied when the text stated that there were “downside risks to economic activity” (or close substitutes to this)”.

Below there is an example of how the hawkometer looked in the second week of January 2007. Guess what it said!

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