Do Monetary Policy Announcements Shift Household Expectations?

69 Pages Posted: 11 Feb 2020

See all articles by Karel Mertens

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas

Daniel J. Lewis

Federal Reserve Banks - Federal Reserve Bank of New York

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 2020

Abstract

We use a decade of daily survey data from Gallup to study how monetary policy influences households' beliefs about economic conditions. We first document that public confidence in the state of the economy reacts instantaneously to certain types of macroeconomic news. Next, we show that surprises to the Federal Funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. Specifically, we find that a surprise increase in the target rate robustly leads to an immediate decline in household confidence, at odds with previous findings that suggest consumers are largely inattentive to economic developments. Monetary policy news about forward guidance and asset purchases does not have similarly clear and robust immediate effects on household beliefs. We document heterogeneity across demographics in the responsiveness of macroeconomic beliefs to aggregate news, and we relate our findings to existing evidence on informational rigidities.

Keywords: central bank communication, consumer con dence, high frequency identi cation, informational rigidities, monetary policy shocks

Suggested Citation

Mertens, Karel and Lewis, Daniel J. and Makridis, Christos, Do Monetary Policy Announcements Shift Household Expectations? (January 2020). CEPR Discussion Paper No. DP14360, Available at SSRN: https://ssrn.com/abstract=3535444

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Daniel J. Lewis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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