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First Impressions Matter: Signalling as a Source of Policy Dynamics

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  • 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," Review of Economic Studies, Oxford University Press, 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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    1. Giorgio E. Primiceri, 2006. "Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 867-901.
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    Citations

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    Cited by:

    1. Neuenkirch, Matthias & Tillmann, Peter, 2014. "Superstar Central Bankers," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100489, Verein für Socialpolitik / German Economic Association.
    2. Riboni, Alessandro & Ruge-Murcia, Francisco, 2014. "Dissent in monetary policy decisions," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 137-154.
    3. Carlos Carvalho & Tiago Fl´orido & Eduardo Zilberman, "undated". "Transitions in Central Bank Leadership," Textos para discussão 657, Department of Economics PUC-Rio (Brazil).
    4. Malmendier, Ulrike M. & Nagel, Stefan & Yan, Zhen, 2017. "The Making of Hawks and Doves: Inflation Experiences on the FOMC," CEPR Discussion Papers 11902, C.E.P.R. Discussion Papers.
    5. repec:eee:wdevel:v:106:y:2018:i:c:p:40-50 is not listed on IDEAS
    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. 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.
    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.

    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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