First Impressions Matter: Signalling as a Source of Policy Dynamics

Oct 2016

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

DOI: https://doi.org/10.1093/restud/rdw007

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.