Do people undestand monetary policy?
AbstractWe 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 InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-01.
Date of creation: 2012
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Do people know what the Taylor Rule is?
by Economic Logician in Economic Logic on 2012-03-30 14:01:00
- 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
201401, Hamburg University, Department Wirtschaft und Politik.
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- 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.
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