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

Edward Knotek, James Mitchell, Mathieu Pedemonte and Taylor Shiroff

No 24-01, Working Papers from Federal Reserve Bank of Cleveland

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 (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 60
Date: 2024-01-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-exp and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.26509/frbc-wp-202401 Persistent Link (text/html)
https://www.clevelandfed.org/-/media/project/cleve ... pers/2024/wp2401.pdf Full Text (application/pdf)

Related works:
Working Paper: The Effects of Interest Rate Increases on Consumers’ Inflation Expectations: The Roles of Informedness and Compliance (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:97534

Ordering information: This working paper can be ordered from

DOI: 10.26509/frbc-wp-202401

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().