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Do people undestand monetary policy?

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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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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  1. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," NBER Working Papers 17958, National Bureau of Economic Research, Inc.
  2. Eusepi, Stefano & Preston, Bruce, 2007. "Central bank communication and expectations stabilization," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-43.
  3. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert Van der Klaauw & Basit Zafar, 2011. "Inflation expectations and behavior: Do survey respondents act on their beliefs?," Staff Reports 509, Federal Reserve Bank of New York.
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  12. 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).
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  14. 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.
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  16. James D. Hamilton & Seth Pruitt & Scott Borger, 2011. "Estimating the Market-Perceived Monetary Policy Rule," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 1-28, July.
  17. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2009. "Financial Literacy and Retirement Planning in the Netherlands," DNB Working Papers 231, Netherlands Central Bank, Research Department.
  18. Bucher-Koenen, Tabea & Lusardi, Annamaria, 2011. "Financial literacy and retirement planning in Germany," MEA discussion paper series 11239, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  19. Daniel Tortorice, 2010. "Unemployment Expectations and the Business Cycle," Working Papers 05, Brandeis University, Department of Economics and International Businesss School, revised Mar 2011.
  20. Sandra Schmidt & Dieter Nautz, 2010. "Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions?," SFB 649 Discussion Papers SFB649DP2010-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

  1. Drager, Lena & Lamla, Michael & Pfajfar, Damjan, 2015. "Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News," Finance and Economics Discussion Series 2015-35, Board of Governors of the Federal Reserve System (U.S.).
  2. Bernd Hayo & Edith Neuenkirch, 2015. "The Influence of Media Use on Laymen’s Monetary Policy Knowledge in Germany," MAGKS Papers on Economics 201511, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Michael J. Lamla & Lena Dräger & Damjan Pfajfar, 2013. "Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication," KOF Working papers 13-345, KOF Swiss Economic Institute, ETH Zurich.
  4. Michael Ehrmann, 2015. "Targeting Inflation from Below: How Do Inflation Expectations Behave?," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 213-249, September.
  5. P. Andrade & G. Gaballo & E. Mengus & B. Mojon, 2015. "Forward Guidance and Heterogeneous Beliefs," Working papers 573, Banque de France.
  6. Francesco D'Acunto & Daniel Hoang & Michael Weber, 2016. "Unconventional Fiscal Policy, Inflation Expectations, and Consumption Expenditure," CESifo Working Paper Series 5793, CESifo Group Munich.
  7. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar, 2015. "How Do Firms Form Their Expectations? New Survey Evidence," NBER Working Papers 21092, National Bureau of Economic Research, Inc.
  8. Lena Dräger & Michael J. Lamla, 2015. "Disagreement à la Taylor: Evidence from Survey Microdata," Macroeconomics and Finance Series 201503, Hamburg University, Department Wirtschaft und Politik.
  9. Rüdiger Bachmann & Tim O. Berg & Eric R. Sims, 2012. "Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence," NBER Working Papers 17958, National Bureau of Economic Research, Inc.
  10. Michael Weber & Daniel Hoang & Francesco D'Acunto, 2015. "Inflation Expectations and Consumption Expenditure," 2015 Meeting Papers 1266, Society for Economic Dynamics.
  11. Pierre L. Siklos, 2016. "Forecast Disagreement and the Inflation Outlook: New International Evidence," IMES Discussion Paper Series 16-E-03, Institute for Monetary and Economic Studies, Bank of Japan.

This item is featured on the following reading lists or Wikipedia pages:

  1. Economic Logic blog

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