Authors: Michael F. McMahon and Stephen E. Hansen
Review of Economic Studies, Vol. 83, No 4, 1645-1672, February, 2016We 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, second, types that weigh output more should have a more pronounced shift. Voting data from the Bank of England’s Monetary Policy Committee strongly supports 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.