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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 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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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1074.

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Date of creation: Sep 2011
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Handle: RePEc:cep:cepdps:dp1074
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  1. John C. Williams & Athanasios Orphanides, 2004. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations," Computing in Economics and Finance 2004 144, Society for Computational Economics.
  2. 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.
  3. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April.
  4. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 649-665, 07.
  5. 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.
  6. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
  7. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
  8. Stephen Hansen & Michael McMahon, 2013. "Estimating Bayesian decision problems with heterogeneous priors," LSE Research Online Documents on Economics 51547, London School of Economics and Political Science, LSE Library.
  9. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  10. Francesco Bianchi & Leonardo Melosi, 2013. "Constrained Discretion and Central Bank Transparency," Working Papers 13-13, Duke University, Department of Economics.
  11. 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.
  12. Eric Maskin, 2003. "The Politician and the Judge: Accountability in Government," Theory workshop papers 505798000000000076, UCLA Department of Economics.
  13. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  14. Eijffinger, Sylvester C W & Mahieu, Ronald J & Raes, Louis, 2013. "Inferring hawks and doves from voting records," CEPR Discussion Papers 9418, C.E.P.R. Discussion Papers.
  15. Stephen Coate & Timothy Besley, 2000. "Elected versus Appointed Regulators: Theory and Evidence," NBER Working Papers 7579, National Bureau of Economic Research, Inc.
  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.
  17. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  18. 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.
  19. 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.
  20. 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.
  21. repec:oup:restud:v:66:y:1999:i:1:p:169-82 is not listed on IDEAS
  22. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  23. 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.
  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. 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.
  26. Stephen Hansen & Michael F. McMahon, 2008. "Delayed Doves: MPC Voting Behaviour of Externals," CEP Discussion Papers dp0862, Centre for Economic Performance, LSE.
  27. 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.
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