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Do People Understand Monetary Policy?

50 Pages Posted: 15 Jan 2012 Last revised: 24 Apr 2014

Carlos Carvalho

Central Bank of Brazil; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Fernanda Nechio

Federal Reserve Bank of San Francisco

Date Written: April 11, 2014

Abstract

We combine questions from the Michigan Survey about future inflation, unemployment, and interest rates to investigate whether households are aware of the basic features of U.S. monetary policy. Our findings provide evidence that some households form their expectations in a way that is consistent with a Taylor (1993)-type rule. We also document a large degree of variation in the pattern of responses over the business cycle. In particular, the negative relationship between unemployment and interest rates that is apparent in the data only shows up in households' answers during periods of labor market weakness.

Keywords: survey data, monetary policy, communication, Taylor rule, inflation expectations, Michigan Survey, Survey of Professional Forecasters

JEL Classification: E52, E58

Suggested Citation

Carvalho, Carlos and Nechio, Fernanda, Do People Understand Monetary Policy? (April 11, 2014). Available at SSRN: https://ssrn.com/abstract=1984321 or http://dx.doi.org/10.2139/ssrn.1984321

Carlos Carvalho (Contact Author)

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Fernanda Nechio

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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