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Do people undestand monetary policy?

  • Carlos Carvalho
  • Fernanda Nechio

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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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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