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Do people understand monetary policy?

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  • Carvalho, Carlos
  • Nechio, Fernanda

Abstract

We combine questions from the Michigan Survey about future inflation, unemployment, and interest rates to investigate whether households are aware of the basic features of U.S. monetary policy. Our findings provide evidence that some households form their expectations in a way that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in the pattern of responses over the business cycle. In particular, the negative relationship between unemployment and interest rates that is apparent in the data only shows up in households׳ answers during periods of labor market weakness.

Suggested Citation

  • Carvalho, Carlos & Nechio, Fernanda, 2014. "Do people understand monetary policy?," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 108-123.
  • Handle: RePEc:eee:moneco:v:66:y:2014:i:c:p:108-123
    DOI: 10.1016/j.jmoneco.2014.04.013
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