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First Impressions Matter: Signalling as a Source of Policy Dynamics

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  • Michael McMahon

    (University of Warwick)

  • Stephen Hansen

    (Pompeu Fabra)

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 fits 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 Society for Economic Dynamics in its series 2012 Meeting Papers with number 1163.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1163

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  1. Timothy Besley & Neil Meads & Paolo Surico, 2008. "Insiders versus Outsiders in Monetary Policymaking," American Economic Review, American Economic Association, vol. 98(2), pages 218-23, May.
  2. Orphanides, Athanasios & Williams, John C., 2004. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," CFS Working Paper Series 2004/24, Center for Financial Studies (CFS).
  3. 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.
  4. Stephen Hansen & Michael F. McMahon, 2008. "Delayed Doves: MPC Voting Behaviour of Externals," CEP Discussion Papers dp0862, Centre for Economic Performance, LSE.
  5. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  6. Kalai, Ehud & Lehrer, Ehud, 1994. "Weak and strong merging of opinions," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 73-86, January.
  7. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  8. Hansen, Stephen & McMahon, Michael, 2011. "How Experts Decide : Identifying Preferences versus Signals from Policy Decisions," The Warwick Economics Research Paper Series (TWERPS) 963, University of Warwick, Department of Economics.
  9. Timothy Besley & Stephen Coate, 2003. "Elected Versus Appointed Regulators: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1176-1206, 09.
  10. 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.
  11. Eric Maskin & Jean Tirole, 2004. "The Politician and the Judge: Accountability in Government," Economics Working Papers 0020, Institute for Advanced Study, School of Social Science.
  12. Anne Sibert, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CESifo Working Paper Series 226, CESifo Group Munich.
  13. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
  14. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  15. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 649-665.
  16. 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.
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Cited by:
  1. 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).
  2. Matthias Neuenkirch & Peter Tillmann, 2013. "Superstar Central Bankers," Research Papers in Economics 2013-08, University of Trier, Department of Economics.
  3. 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).

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