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First Impressions Matter: Signalling as a Source of Policy Dynamics

  • Hansen, Stephen
  • McMahon, Michael

We provide the first direct empirical support for the relevance of signalling in monetary policy. In our dynamic model, central bankers make policy under uncertain inflationary conditions and place different weights on output fluctuations. Signalling leads all bankers to be tougher on inflation initially, but to become less tough with experience. This evolution is more pronounced for members who weight output more ("doves"), which provides an additional test of our model. We structurally estimate the model using Bank of England data and confirm both predictions. Signalling increases the probability new members vote for high interest rates by up to 35%.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9607.

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Date of creation: Aug 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9607
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