Establishing a hawkish reputation: interest rate setting by newly appointed central bank governors

Abstract

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Disagreement between FOMC members and the Fed’s staff: New insights based on a counterfactual interest rate

“…Next, we find that career characteristics of FOMC members are significant in explaining internal disagreement. The variable related to the length of time FOMC committee members have served, indicates that members with more experience tend to disagree on the dovish side, which is in accordance with the finding of Neuenkirch (2015). However, we only document a significant effect when considering the precrisis subsample.…”

“…Therefore, we include a dummy for women in the FOMC to control for gender effects in monetary policy-making. Finally, Neuenkirch (2015) finds that newly appointed governors fight inflation more aggressively during the first four to eight quarters of their tenure, showing that there is a relationship between experience and monetary policy preferences. We thus include a variable measuring experience in the FOMC for each member.…”

Party Affiliation Rather than Former Occupation: The Background of Central Bank Governors and its Effect on Monetary Policy

“…Every additional year in office increases sensitivity toward the output gap by 0.05 pp and decreases sensitivity toward inflation by 0.04 pp. This finding is well in line with Neuenkirch (2012), who argues that governors seek to establish a hawkish reputation at the beginning of their incumbencies and also supports the "weak until proven strong" hypothesis (e.g., Kuttner and Posen, 2010). Second, central bank governors who are affiliated with a political party prefer a significantly lower steady-state interest rate, react much more sensitively to business cycle fluctuations, and react far less strongly to inflation.…”

“…After having established a reputation for being inflation-averse and thus warding off an increase in inflation expectations, the central banker can switch to the actual preferred level of inflation-aversion, which should be lower than initially signaled. Hansen andMcMahon (2011) andNeuenkirch (2012) observe such behavior for the Bank of England and 15 OECD countries, respectively. Therefore, our final hypothesis is as follows:…”