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Title: First Impressions Matter: Signalling as a Source of Policy Dynamics

Author(s): Stephen Hansen and Michael McMahon

Publication Date: August 2013

Keyword(s): committees, monetary policy and signalling

Programme Area(s): International Macroeconomics

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%.

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Bibliographic Reference

Hansen, S and McMahon, M. 2013. 'First Impressions Matter: Signalling as a Source of Policy Dynamics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9607