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First Impressions Matter: Signalling as a Source of Policy Dynamics

  • Stephen Hansen
  • Michael McMahon

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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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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  1. 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).
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  4. Francesco Bianchi & Leonardo Melosi, 2013. "Constrained Discretion and Central Bank Transparency," Working Papers 13-13, Duke University, Department of Economics.
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  6. Stephen Hansen & Michael McMahon, 2013. "Estimating Bayesian Decision Problems with Heterogeneous Priors," Working Papers 683, Barcelona Graduate School of Economics.
  7. Stephen Hansen & Michael McMahon, 2011. "How Experts Decide: Identifying Preferences versus Signals from Policy Decisions," CEP Discussion Papers dp1063, Centre for Economic Performance, LSE.
  8. 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.
  9. Gerling, Kerstin & Gruner, Hans Peter & Kiel, Alexandra & Schulte, Elisabeth, 2005. "Information acquisition and decision making in committees: A survey," European Journal of Political Economy, Elsevier, vol. 21(3), pages 563-597, September.
  10. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
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  12. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis.
  14. Richard A. Posner, 1974. "Theories of Economic Regulation," NBER Working Papers 0041, National Bureau of Economic Research, Inc.
  15. Stephen Hansen & Michael McMahon, 2008. "Delayed doves: MPC voting behaviour of externals," LSE Research Online Documents on Economics 19611, London School of Economics and Political Science, LSE Library.
  16. Besley, Timothy & Meads, Neil & Surico, Paolo, 2007. "Insiders versus Outsiders in Monetary Policy-Making," Discussion Papers 20, Monetary Policy Committee Unit, Bank of England.
  17. 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.
  18. Robert J. Barro, 1986. "Reputation in a Model of Monetary Policy with Incomplete Information," NBER Working Papers 1794, National Bureau of Economic Research, Inc.
  19. Anne Sibert, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CESifo Working Paper Series 226, CESifo Group Munich.
  20. 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.
  21. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  22. Matias Iaryczower & Matthew Shum, 2012. "The Value of Information in the Court: Get It Right, Keep It Tight," American Economic Review, American Economic Association, vol. 102(1), pages 202-37, February.
  23. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
  24. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 649-665.
  25. Timothy Feddersen & Wolfgang Pesendorfer, 1996. "Convicting the Innocent: The Inferiority of Unanimous Jury Verdicts," Discussion Papers 1170, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  26. 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.
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