San Fran Fed Asks If "People Understand Monetary Policy"; Finds Those With "No High School Diploma" Don't
For their sake, we hope at least the answer from the Fed is "yes." Yet it is quite ironic that the subtext of this paper is that Monetary Policy can actually fail, when, get this, people don't grasp all the nuances of monetary policy. In other words, it is not the Fed's fault when it fails - it is the people's fault: "we fi?nd evidence that the relationship between unemployment and interest rates is not properly understood by households in the lowest income quartile, and by those with no high school diploma." Cue Kartik Athreya to explain to us all why only Ph.D.s understand the complexities of monetary policy when it works, and why it is those without a highscool diploma that are at fault, when it doesn't.
Do People Understand Monetary Policy?
By Carlos Carvalho and Fernanda Nechio
We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether U.S. households are aware of the so-called Taylor (1993) rule. For comparison, we perform the same analysis using questions from the Survey of Professional Forecasters. Our fi?ndings support the view that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules. The extent to which this happens, however, does not appear to be uniform across income and education levels. In particular, we fi?nd evidence that the relationship between unemployment and interest rates is not properly understood by households in the lowest income quartile, and by those with no high school diploma. We also fi?nd evidence that the perceived effect of unemployment on interest rates is asymmetric, being relevant only for interest-rate decreases. Finally, we argue that the relationships we uncover can be given a causal interpretation.