Review of Economic Studies Vol. 83 No. 4 2016

First Impressions Matter: Signalling as a Source of Policy Dynamics

Stephen Hansen^1,2,3; Michael McMahon^4,5,6

¹ Universitat Pompeu Fabra · ² University of Oxford · ³ Barcelona School of Economics · ⁴ Center for Economic and Policy Research · ⁵ University of Warwick · ⁶ London School of Economics and Political Science

Abstract

We provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model. First, all policymaker types should become less tough on inflation over time and secondly, types that weigh output more should have a more pronounced shift. Voting data from the Bank of England's Monetary Policy Committee strongly support both predictions. Counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle, and improves the committee designer's welfare. Implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes.

DOI

10.1093/restud/rdw007

Volume

83

Issue

4

Pages

1645-1672

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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