First Impressions Matter: Signalling as a Source of Policy Dynamics

Oct 2016

The Review of Economic Studies, Volume 83, Issue 4, p. 1645–1672


Stephen Hansen, Michael McMahon

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.