The Effects of Interest Rate Increases on Consumers' Inflation Expectations: The Roles of Informedness and Compliance

60 Pages Posted: 3 Jan 2024

See all articles by Edward S. Knotek

Edward S. Knotek

Federal Reserve Bank of Cleveland

James Mitchell

Federal Reserve Bank of Cleveland

Mathieu Pedemonte

Inter-American Development Bank (IDB)

Taylor Shiroff

Federal Reserve Bank of Cleveland

Date Written: January 3, 2024

Abstract

We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers' inflation expectations. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence on average that communicating policy changes lowers consumers' medium-term inflation expectations. However, information differs systematically across demographic groups, in terms of ex ante informedness about monetary policy and ex post compliance with the information treatment. Monetary policy communications have a much stronger effect on people who had not previously heard news about monetary policy and who take sufficient time to read the treatment, implying scope to increase the impact of communications by targeting specific groups of the general public. Our findings show that, in an inflationary environment, consumers expect that raising interest rates will lower inflation. More generally, our results emphasize the importance of measuring both respondents' information sets and their compliance with treatment when using RCTs in empirical macroeconomics, to better understand the well-documented evidence of heterogeneous treatment effects.

Keywords: expectations formation, policy communication, monetary policy, inflation, surveys

JEL Classification: E31, E52, E58

Suggested Citation

Knotek, Edward S. and Mitchell, James and Pedemonte, Mathieu and Shiroff, Taylor, The Effects of Interest Rate Increases on Consumers' Inflation Expectations: The Roles of Informedness and Compliance (January 3, 2024). FRB of Cleveland Working Paper No. 24-01, https://doi.org/10.26509/frbc-wp-202401, Available at SSRN: https://ssrn.com/abstract=4682893

Edward S. Knotek (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

James Mitchell

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

HOME PAGE: http://https://www.clevelandfed.org/en/our-research/economists/james-mitchell.aspx

Mathieu Pedemonte

Inter-American Development Bank (IDB)

1300 New York Avenue NW
Washington, DC 20577
United States

Taylor Shiroff

Federal Reserve Bank of Cleveland ( email )

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