Working Paper: CEPR ID: DP14360
Authors: Karel Mertens; Daniel Lewis; Christos Makridis
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: Monetary Policy Shocks; Central Bank Communication; Informational Rigidities; Consumer Confidence; High Frequency Identification
JEL Codes: E30; E40; E50; E70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Surprises to the federal funds target rate (E52) | Household economic confidence (D19) |
| Surprise increase in the target rate (E52) | Immediate decline in household confidence (D12) |
| Monetary policy announcements (E60) | Household economic expectations (D19) |
| Forward guidance and asset purchase announcements (E60) | Household beliefs (D10) |
| Demographic differences in responses to monetary policy news (J19) | Reactions to monetary policy announcements (E60) |