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Monetary Policy According to Households: Perceptions, Reactions, and Channels

Author

Listed:
  • Grigoli, Francesco

    (Georgetown University)

  • Sandri, Damiano

    (Bank for International Settlements)

  • Gorodnichenko, Yuriy

    (University of California, Berkeley)

  • Coibion, Olivier

    (University of Texas, Austin)

Abstract

This paper studies how households perceive the transmission of monetary policy and how these perceptions affect their decisions. Using a large-scale survey of over 25,000 U.S. households combined with randomized information treatments, we measure how households expect changes in the federal funds rate to affect economic conditions and their own behavior. Households report that higher interest rates lead them to reduce their spending, particularly on durable goods. However, the mechanisms underlying this response differ markedly from those in standard macroeconomic models. Respondents expect monetary tightening to raise borrowing costs and inflation. In turn, consumption function estimates identified using information treatments reveal that households respond to higher expected inflation by reducing consumption. Household inflation expectations also emerge as a central driver of portfolio reallocations following monetary policy changes.

Suggested Citation

  • Grigoli, Francesco & Sandri, Damiano & Gorodnichenko, Yuriy & Coibion, Olivier, 2026. "Monetary Policy According to Households: Perceptions, Reactions, and Channels," IZA Discussion Papers 18591, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18591
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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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