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

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  • Knotek, Edward S
  • Mitchell, James
  • Pedemonte, Mathieu
  • Shiroff, Taylor

Abstract

We study how monetary policy communications associated with increasing the federal funds rate causally affect consumers inflation expectations in real time. In a large-scale, multi-wave randomized controlled trial (RCT), we find weak evidence that communicating these policy changes lowers consumers medium-term inflation expectations on average. 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 the subset of consumers who had not previously heard news about monetary policy and who take sufficient time to read the treatment. Our findings show that, in an inflationary environment, these 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 real-world implications of monetary policy communications.

Suggested Citation

  • Knotek, Edward S & Mitchell, James & Pedemonte, Mathieu & Shiroff, Taylor, 2024. "The Effects of Interest Rate Increases on Consumers’ Inflation Expectations: The Roles of Informedness and Compliance," IDB Publications (Working Papers) 13758, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:13758
    DOI: https://dx.doi.org/10.18235/0013184
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    1. Dräger, Lena & Dalloul, Ami & Nghiem, Giang, 2024. "Anchoring Household's Inflation Expectations when Inflation is High," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302397, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Expectations formation; Policy communication; Monetary policy; Inflation; surveys;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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