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Do people undestand monetary policy?

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Author Info

  • Carlos Carvalho
  • Fernanda Nechio

Abstract

We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether U.S. households are aware of the so-called Taylor (1993) rule. For comparison, we perform the same analysis using questions from the Survey of Professional Forecasters. Our findings support the view that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules. The extent to which this happens, however, does not appear to be uniform across income and education levels. In particular, we find evidence that the relationship between unemployment and interest rates is not properly understood by households in the lowest income quartile, and by those with no high school diploma. We also find evidence that the perceived effect of unemployment on interest rates is asymmetric, being relevant only for interest-rate decreases. Finally, we argue that the relationships we uncover can be given a causal interpretation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-01.

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Date of creation: 2012
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Handle: RePEc:fip:fedfwp:2012-01

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Keywords: Monetary policy;

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References

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  1. Stefano Eusepi & Bruce Preston, 2010. "Central Bank Communication and Expectations Stabilization," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 235-71, July.
  2. Hervé Le Bihan & Philippe Andrade, 2010. "Inattentive Professional Forecasters," 2010 Meeting Papers 1144, Society for Economic Dynamics.
  3. James D. Hamilton & Seth Pruitt & Scott C. Borger, 2009. "The market-perceived monetary policy rule," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 982, Board of Governors of the Federal Reserve System (U.S.).
  4. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  5. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  6. Tortorice Daniel Louis, 2012. "Unemployment Expectations and the Business Cycle," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 12(1), pages 1-49, January.
  7. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy and Retirement Planning in the United States," CeRP Working Papers 107, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  8. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," Working Papers, Department of Economics, College of William and Mary 102, Department of Economics, College of William and Mary.
  9. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  10. Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence," Working Papers 015, University of Notre Dame, Department of Economics, revised Mar 2012.
  11. Fabia A. de Carvalho & André Minella, 2009. "Market Forecasts in Brazil: performance and determinants," Working Papers Series, Central Bank of Brazil, Research Department 185, Central Bank of Brazil, Research Department.
  12. Charles F. Manski & Elie Tamer, 2002. "Inference on Regressions with Interval Data on a Regressor or Outcome," Econometrica, Econometric Society, Econometric Society, vol. 70(2), pages 519-546, March.
  13. Carlos Madeira & Basit Zafar, 2012. "Heterogeneus Inflation Expectations Learning and Market Outcomes," Working Papers Central Bank of Chile, Central Bank of Chile 667, Central Bank of Chile.
  14. Wilbert van der Klaauw & Wandi Bruine de Bruin & Giorgio Topa & Basit Zafar & Olivier Armantier, 2012. "Inflation Expectations and Behavior: Do Survey Respondents Act on their Beliefs?," 2012 Meeting Papers, Society for Economic Dynamics 121, Society for Economic Dynamics.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Do people know what the Taylor Rule is?
    by Economic Logician in Economic Logic on 2012-03-30 14:01:00
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Cited by:
  1. Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend, Cross-Sectional Evidence," Working Papers 015, University of Notre Dame, Department of Economics, revised Mar 2012.
  2. Andrade, Philippe & Crump, Richard K. & Eusepi, Stefano & Moench, Emanuel, 2013. "Noisy information and fundamental disagreement," Staff Reports 655, Federal Reserve Bank of New York.
  3. Jinill Kim & Seth Pruitt, 2013. "Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero," CAMA Working Papers 2013-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2014. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201401, Hamburg University, Department Wirtschaft und Politik.
  5. Guimarães, Rodrigo, 2014. "Expectations, risk premia and information spanning in dynamic term structure model estimation," Bank of England working papers 489, Bank of England.

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  1. Economic Logic blog

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