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First Impressions Matter: Signalling as a Source of Policy Dynamics

Author

Listed:
  • Stephen Hansen
  • Michael McMahon

Abstract

We provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model. First, all policymaker types should become less tough on inflation over time and secondly, types that weigh output more should have a more pronounced shift. Voting data from the Bank of England's Monetary Policy Committee strongly support both predictions. Counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle, and improves the committee designer's welfare. Implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes.

Suggested Citation

  • Stephen Hansen & Michael McMahon, 2016. "First Impressions Matter: Signalling as a Source of Policy Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(4), pages 1645-1672.
    • Handle: RePEc:oup:restud:v:83:y:2016:i:4:p:1645-1672.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw007
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    Cited by:

    1. Tillmann, Peter, 2021. "Financial markets and dissent in the ECB’s Governing Council," European Economic Review, Elsevier, vol. 139(C).
    2. Francesco Salsano, 2022. "Monetary policy when the objectives of central bankers are imperfectly observable," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(4), pages 396-415, September.
    3. Nagel, Stefan & Malmendier, Ulrike M. & Yan, Zhen, 2017. "The Making of Hawks and Doves: Inflation Experiences on the FOMC," CEPR Discussion Papers 11902, C.E.P.R. Discussion Papers.
    4. Bauchet, Jonathan & Chakravarty, Sugato & Hunter, Brian, 2018. "Separating the wheat from the chaff: Signaling in microfinance loans," World Development, Elsevier, vol. 106(C), pages 40-50.
    5. Qiu, Yue & Wang, Kaixin & Xie, Wenjing & Zheng, Xiangzhong, 2025. "The power of policy words: PBC communications and their impact on capital flows amidst global crises," China Economic Review, Elsevier, vol. 93(C).
    6. Matthias Neuenkirch & Peter Tillmann, 2016. "Does A Good Central Banker Make A Difference?," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1541-1560, July.
    7. Matthias Neuenkirch & Florian Neumeier, 2015. "Party affiliation rather than former occupation: the background of central bank governors and its effect on monetary policy," Applied Economics Letters, Taylor & Francis Journals, vol. 22(17), pages 1424-1429, November.
    8. Malmendier, Ulrike & Nagel, Stefan & Yan, Zhen, 2021. "The making of hawks and doves," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 19-42.
    9. Hansen, Stephen & McMahon, Michael & Velasco Rivera, Carlos, 2014. "Preferences or private assessments on a monetary policy committee?," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 16-32.
    10. Laura Gáti, 2023. "Talking Over Time ‐ Dynamic Central Bank Communication," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1147-1176, August.
    11. Neuenkirch, Matthias & Tillmann, Peter, 2014. "Superstar Central Bankers," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100489, Verein für Socialpolitik / German Economic Association.
    12. Riboni, Alessandro & Ruge-Murcia, Francisco, 2014. "Dissent in monetary policy decisions," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 137-154.
    13. Klodiana Istrefi, 2019. "In Fed Watchers Eyes: Hawks, Doves and Monetary Policy," Working papers 725, Banque de France.
    14. Carlos Carvalho & Tiago Fl´orido & Eduardo Zilberman, "undated". "Transitions in Central Bank Leadership," Textos para discussão 657, Department of Economics PUC-Rio (Brazil).
    15. Robert G. King & Yang K. Lu, 2020. "Managing Expectations in the New Keynesian Model," HKUST CEP Working Papers Series 202007, HKUST Center for Economic Policy.
    16. Peter Tillmann, 2020. "Financial Markets and Dissent in the ECB’s Governing Council," MAGKS Papers on Economics 202048, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    17. Matthias Neuenkirch, 2015. "Establishing a hawkish reputation: interest rate setting by newly appointed central bank governors," Applied Economics Letters, Taylor & Francis Journals, vol. 22(5), pages 391-396, March.
    18. Bruno Beltrão Léo & Maria Teresa Vieira Campos Proença & Carlos Francisco Ferreira Alves, 2025. "Central bank committee decision-making: a systematic literature review and research agenda," Journal of Banking Regulation, Palgrave Macmillan, vol. 26(3), pages 320-339, September.
    19. Ochs, A. C. R., 2021. "A New Monetary Policy Shock with Text Analysis," Cambridge Working Papers in Economics 2148, Faculty of Economics, University of Cambridge.
    20. Davide Romelli & Hamza Bennani, 2021. "Disagreement inside the FOMC: New Insights from Tone Analysis," Trinity Economics Papers tep1021, Trinity College Dublin, Department of Economics.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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