Working Paper: CEPR ID: DP9607
Authors: Stephen Hansen; Michael McMahon
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 Codes: D78; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| signaling (L96) | likelihood that new members of the MPC will vote for high interest rates (E52) |
| new members signaling hawkishness (F52) | experienced members (Y20) |
| experienced members (Y20) | dovish bias (D91) |
| signaling (L96) | members gain expertise (Y80) |
| experience (Y60) | voting behavior (D72) |
| new members with a dovish bias (D79) | vote for higher rates (D72) |
| experienced members (Y20) | vote in accordance with actual economic states (D72) |