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Do People Understand Monetary Policy?

  • Carlos Carvalho

    ()

    (Department of Economics PUC-Rio)

  • Fernanda Nechio

    (Federal Reserve Bank of San Francisco)

We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether households are aware of the basic features of U.S. monetary policy. Our Öndings support the view that at least some groups of households form their expectations about the future path of interest rates, ináation, and unemployment in a way that is consistent with those features. However, we also document a large degree of variation in the pattern of household responses over the business cycle. In particular, the negative relationship between unemployment and interest rates that is apparent in the data only shows up unequivocally in householdsíanswers during periods of labor market weakness.

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 618.

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Length: 30p
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:rio:texdis:618
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  1. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  2. Madeira, Carlos & Zafar, Basit, 2012. "Heterogeneous inflation expectations and learning," Staff Reports 536, Federal Reserve Bank of New York, revised 01 Jun 2014.
  3. Olivier Armantier & Wändi Bruine de Bruin & Giorgio Topa & Wilbert Klaauw & Basit Zafar, 2015. "Inflation Expectations And Behavior: Do Survey Respondents Act On Their Beliefs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 505-536, 05.
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  6. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," DNB Working Papers 313, Netherlands Central Bank, Research Department.
  7. 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.
  8. Rafael Wouters & Frank Smets & Jordi Gali, 2011. "Unemployment in an Estimated New Keynesian model," 2011 Meeting Papers 1451, Society for Economic Dynamics.
  9. Michael Woodford, 2013. "Macroeconomic Analysis without the Rational Expectations Hypothesis," NBER Working Papers 19368, National Bureau of Economic Research, Inc.
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  11. Charles F. Manski & Elie Tamer, 2002. "Inference on Regressions with Interval Data on a Regressor or Outcome," Econometrica, Econometric Society, vol. 70(2), pages 519-546, March.
  12. Daniel Tortorice, 2010. "Unemployment Expectations and the Business Cycle," Working Papers 05, Brandeis University, Department of Economics and International Businesss School, revised Mar 2011.
  13. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," NBER Working Papers 13259, National Bureau of Economic Research, Inc.
  14. 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.
  15. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-78, August.
  16. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
  17. 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.
  18. 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.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. James D. Hamilton & Seth Pruitt & Scott Borger, 2010. "Estimating the Market-Perceived Monetary Policy Rule," NBER Working Papers 16412, National Bureau of Economic Research, Inc.
  21. James D. Hamilton & Seth Pruitt & Scott C. Borger, 2009. "The market-perceived monetary policy rule," International Finance Discussion Papers 982, Board of Governors of the Federal Reserve System (U.S.).
  22. Carlos Madeira & Basit Zafar, 2012. "Heterogeneus Inflation Expectations Learning and Market Outcomes," Working Papers Central Bank of Chile 667, Central Bank of Chile.
  23. Fabia A. de Carvalho & André Minella, 2009. "Market Forecasts in Brazil: performance and determinants," Working Papers Series 185, Central Bank of Brazil, Research Department.
  24. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
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