Do People Understand 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 only relevant for interest-rate decreases. Finally, we argue that the relationships that we uncover can be given a causal interpretation.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 426.
Date of creation: 2012
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Other versions of this item:
- Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco.
- Carlos Carvalho & Fernanda Nechio, 2013. "Do People Understand Monetary Policy?," Textos para discussÃ£o 618, Department of Economics PUC-Rio (Brazil).
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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
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"Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication,"
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