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Do people undestand monetary policy?

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  • 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.

Suggested Citation

  • Carlos Carvalho & Fernanda Nechio, 2012. "Do people undestand monetary policy?," Working Paper Series 2012-01, Federal Reserve Bank of San Francisco, revised 2012.
    • Handle: RePEc:fip:fedfwp:2012-01
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    Monetary policy;

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