First Impressions Matter: Signalling as a Source of Policy Dynamics

48 Pages Posted: 20 Aug 2013

See all articles by Stephen Hansen

Stephen Hansen

University of Oxford - Department of Economics

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Date Written: August 2013

Abstract

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%.

Keywords: committees, monetary policy, signalling

JEL Classification: D78, E52, E58

Suggested Citation

Hansen, Stephen and McMahon, Michael F., First Impressions Matter: Signalling as a Source of Policy Dynamics (August 2013). CEPR Discussion Paper No. DP9607, Available at SSRN: https://ssrn.com/abstract=2312981

Stephen Hansen (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, Oxfordshire OX1 3UQ
United Kingdom

Michael F. McMahon

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
359
PlumX Metrics