NBER Study Reveals Household Perceptions of Monetary Policy Transmission

A new National Bureau of Economic Research working paper by Francesco Grigoli, Damiano Sandri, Yuriy Gorodnichenko, and Olivier Coibion examines how U.S. households perceive and react to monetary policy changes. Analyzing data from a large-scale survey of over 25,000 households combined with randomized information treatments, the study measures expectations regarding federal funds rate adjustments. The findings indicate that households typically reduce spending, especially on durable goods, when interest rates rise. However, the underlying mechanisms differ significantly from standard macroeconomic models. Respondents associate monetary tightening with increased borrowing costs and higher inflation. Crucially, the research reveals that households reduce consumption primarily in response to elevated inflation expectations rather than interest rates alone. Furthermore, these inflation expectations drive portfolio reallocations following policy shifts. This research highlights a divergence between theoretical models and actual household behavior, emphasizing the central role of inflation expectations in shaping economic decisions. The study provides valuable insights for policymakers aiming to understand the behavioral channels of monetary transmission, suggesting that managing inflation expectations is critical for influencing household consumption and investment patterns effectively.