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Working Paper 07-3

Do Markets Care Who Chairs the Central Bank?

by Kenneth N. Kuttner, Williams College
and Adam S. Posen, Peterson Institute for International Economics

May 2007
Revised July 2008

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The authors assess the effects of central bank governor appointments on financial market expectations of monetary policy. To measure these effects, they assemble a new dataset of appointment announcements from 15 industrialized countries and conduct an event-study analysis on exchange rates, bond yields, and stock prices. In general, financial markets do care who chairs the central bank. They tend to react to new appointments with larger-than-normal price changes, especially when a distinction is made between "newsworthy" announcements (i.e., those plausibly incorporating new information) and those merely confirming an anticipated appointment. There is no evidence, however, that new governors are subject to generic doubts about their credibility, contrary to some theoretical and journalistic presumptions. Appointments of new governors at central banks with strong monetary policy frameworks—combining central bank independence and an explicit nominal anchor—have no market impact. Federal Reserve chairman appointments stand out in terms of their unusually pronounced effects on financial markets, in both directions, which is consistent with the greater personalization and lesser institutionalization of monetary policymaking in the United States than in other advanced economies.


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