Friday, March 30, 2012

Do people know what the Taylor Rule is?

The current doctrine in monetary policy is that central bank need to be very clear about their policy rule so that economic agents can form good expectations about the future path of interest rates and inflation. Whether this communication policy can be questioned, at least from anecdotal evidence, as many people are currently convinced that inflation is currently close to double digits and we are heading towards hyperinflation. But that is only anecdotal. There is better evidence, from the Michigan Survey on Consumers, which ask questions about expectations of future economic conditions.

Carlos Carvalho and Fernanda Nechio ask whether those expectations are consistent with the Taylor Rule that underlies much of monetary policy (at least when the nominal interest is not bound by zero). It turns out that by and large, they are, expect for those with lower education. Surprisingly, the Survey of Professional Forecasters yields less consistent predictions of interest rates and inflation, as if those professional were not believing in the Taylor Rule. It is rather puzzling that the public knows better the monetary policy than the professionals, or is it that the Fed manages to fool the general public, but not the forecasters?

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