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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
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Francesco Bianchi, 2014. "Constrained Discretion and Central Bank Transparency," 2014 Meeting Papers 424, Society for Economic Dynamics.
  2. 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.
  3. Stephen Hansen & Michael McMahon, 2013. "Estimating Bayesian Decision Problems with Heterogeneous Priors," CAMA Working Papers 2013-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. 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.
  5. 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.
  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. Orphanides, Athanasios & Williams, John C, 2005. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations," CEPR Discussion Papers 4865, C.E.P.R. Discussion Papers.
  8. Anne Sibert, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CESifo Working Paper Series 226, CESifo Group Munich.
  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. 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.
  11. 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.
  12. 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.
  13. 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.
  14. Besley, Timothy & Meads, Neil & Surico, Paolo, 2007. "Insiders versus Outsiders in Monetary Policy-Making," Discussion Papers 20, Monetary Policy Committee Unit, Bank of England.
  15. 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.
  16. 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.
  17. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
  18. 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.
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