Banks and banking, Central ; Financial markets ; Monetary policy ; Federal Reserve banks

Ernie Siciliano

English

Research Papers in Economics

Fall 2007 • Region Focus 7
F
ormer Federal Reserve Chairman Alan Greenspan
reportedly received an $8.5 million advance for 
his memoir, The Age of Turbulence. The lofty price 
illustrates the large cache of the title “Chairman of the
Federal Reserve,” a position that is widely perceived as
second in power only to the president. 
Indeed, “central banks’ policies can have significant
macroeconomic effects, and it is often assumed that the 
governor exerts a disproportionate influence over those
policies,” say economists Kenneth Kuttner of Oberlin
College and Adam Posen of the Peterson Institute for
International Economics, explaining the lionization of 
bank governors. In their new 
study published by the National
Bureau of Economic Research,
“Do Markets Care Who Chairs the
Central Bank?” they find that 
markets respond to central bank
governors even before they have a
chance to act.
Kuttner and Posen looked at
the behavior of markets after a
new governor is announced and
find that announcements result in fluctuations in exchange
rates, bond yields, and, to a lesser extent, stock prices. Such
fluctuations indicate that markets expect certain behaviors
from the new governor. 
Kuttner and Posen test two related hypotheses of 
what financial markets anticipate from new governors. (The
authors use the term “governors” interchangeably with
“chairmen.”) First, markets believe that new central bank
governors are “weak” on inflation until proven “strong.” 
If true, then this hypothesis would mean that 
the announcement of new governors would be associated 
with heightened inflation expectations. Second, markets
may interpret the announcement of a new governor 
as a harbinger for future monetary policy, but without the 
presumption that new chairmen will be “weak.”
To test their hypotheses, the authors analyze data from
1974 to 2006 from 15 industrialized countries with flexible
exchange rates. They found 62 announcements of a new 
central bank governor. The economists divided the
announcements into 42 “newsworthy” and 20 “non-news-
worthy” announcements. Non-newsworthy announcements
were when the incoming governor was already anticipated,
while newsworthy appointments were surprise resignations
by incumbent or unknown appointments. 
If, as the first hypothesis suggests, incoming governors are
initially viewed as weak, Kuttner and Posen argue that
expected inflation will rise, causing falling exchange rates, 
rising bond yields, and falling stock prices. However, the
authors find that financial markets do not follow this trend
when a new governor is named. The lack of directional 
movement suggests that financial markets do not specifically
view incoming governors as weak or strong.
The markets’ reactions indicate that the announcement
of a central banker provides some tidbit of information about
future policy. The markets do respond to this tidbit, the
authors find, but the reaction only occurred the day of 
the announcement, and there was no significant reaction in
two days before or after the announcement. (Indeed, this 
is what one would expect if the
announcement was not leaked in
advance and the capital markets
efficiently incorporated the new
information.)
Further demonstrating the 
efficiency of financial markets, 
the economists found that the 
foreign exchange market react
only to newsworthy appointments
— as the market had already
priced in previously named governors. The bond market
reacts to newsworthy events, but curiously also react to 
non-newsworthy events. Stock markets react only to 
newsworthy events. According to the authors, the weaker 
significance is probably due to the fact that stock prices
reflect future earnings more so than central bank policy.
Moreover, future earnings are affected by many factors, of
which central bank policy is only one. However, the 
economists cited “a few strong reactions” in the stock 
market, such as in 2005 when Ben Bernanke took control 
at the Federal Reserve.
Such strong reactions are emblematic of U.S. financial
markets, which generally react more aggressively than 
foreign markets. Kuttner and Posen offer two 
explanations: First, U.S. data “tended to contain a larger 
element of surprise than many of the other appointments in
the sample,” and thus may have biased the results. Second,
the Federal Reserve’s announcements may face more 
scrutiny in America — the result of more aggressive press
coverage, a more active Federal Reserve, a lack of “a clearly
defined policy mandate” such as inflation targeting, or what
the authors describe as a “certain American institutional
tendency to ‘personalize’ monetary policy.” By that, the
authors refer to the tendency of the public to attribute 
the effectiveness of monetary policy to the individual 
personality or wisdom of the chairman.  RF
Influential Chairmen
BY ERNIE SICILIANO
RESEARCHSPOTLIGHT 
“Do Markets Care Who Chairs the
Central Bank?” By Kenneth N. Kuttner
and Adam S. Posen. National Bureau 
of Economic Research Working 
Paper 13101, May 2007. 

Research spotlight : Influential chairmen

http://www.richmondfed.org/publications/research/region_focus/2007/fall/pdf/research_spotlight.pdf

Research spotlight : Influential chairmen

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