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First Impressions Matter: Signalling as a Source of Policy Dynamics

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  • Stephen Hansen
  • Michael McMahon

Abstract

We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better ts the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts' policy choices.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 572.

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Date of creation: Aug 2011
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Handle: RePEc:bge:wpaper:572

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Keywords: Signalling; Learning; Monetary Policy;

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References

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  1. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
  2. Besley, Timothy & Meads, Neil & Surico, Paolo, 2007. "Insiders versus Outsiders in Monetary Policy-Making," Discussion Papers 20, Monetary Policy Committee Unit, Bank of England.
  3. Eric Maskin, 2003. "The Politician and the Judge: Accountability in Government," Theory workshop papers 505798000000000076, UCLA Department of Economics.
  4. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
  5. Stephen Hansen & Michael McMahon, 2011. "How Experts Decide: Identifying Preferences versus Signals from Policy Decisions," CEP Discussion Papers dp1063, Centre for Economic Performance, LSE.
  6. James Bullard & Stefano Eusepi, 2003. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Paper 2003-20, Federal Reserve Bank of Atlanta.
  7. Stephen Coate & Timothy Besley, 2000. "Elected versus Appointed Regulators: Theory and Evidence," NBER Working Papers 7579, National Bureau of Economic Research, Inc.
  8. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  9. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  10. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
  11. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 649-665.
  13. Clare Leaver, 2009. "Bureaucratic Minimal Squawk Behavior: Theory and Evidence from Regulatory Agencies," American Economic Review, American Economic Association, vol. 99(3), pages 572-607, June.
  14. Ehud Kalai & Ehud Lehrer, 1992. "Weak and Strong Merging of Opinions," Discussion Papers 983, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
  16. Stephen Hansen & Michael F. McMahon, 2008. "Delayed Doves: MPC Voting Behaviour of Externals," CEP Discussion Papers dp0862, Centre for Economic Performance, LSE.
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Cited by:
  1. Matthias Neuenkirch & Peter Tillmann, 2013. "Superstar Central Bankers," Research Papers in Economics 2013-08, University of Trier, Department of Economics.
  2. Matthias Neuenkirch, 2012. "Establishing a Hawkish Reputation: Interest Rate Setting by Newly Appointed Central Bank Governors," MAGKS Papers on Economics 201246, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Matthias Neuenkirch & Florian Neumeier, 2013. "Party Affiliation Rather than Former Occupation: The Background of Central Bank Governors and its Effect on Monetary Policy," MAGKS Papers on Economics 201336, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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