Monetary Policy Shocks and Consumer Inflation Expectations: An Empirical Study

Date created: 
2016-05-26
Identifier: 
etd9669
Keywords: 
Monetary policy
Inflation expectations
Policy shock
Michigan survey
Survey of consumers
Abstract: 

Economists have become very interested in the relationship between monetary policy and inflation expectations. However, most research has focused on professional forecasters rather than consumers' expectations. This paper explores interactions between monetary policy and consumer expectations. Specifically, we estimate the impact of monetary policy shocks on consumer expectations. Using a simple linear regression model and data from the Michigan Survey of Consumers, we found somewhat surprising results. Namely, that consumers adjust their expectations positively in response to an unexpected tightening of monetary policy. This suggests the existence of the "signalling channel" of monetary policy. We control for a host of macroeconomic and demographic variables, and our results are consistent across income and education groups. In line with previous research, we found greater heterogeneity in expectations for lower-income and lower-educated groups. Our research challenges conventional thinking regarding the influence of monetary policy on inflation Expectations, and suggests that this relationship is more complex.

Document type: 
Graduating extended essay / Research project
Rights: 
This thesis may be printed or downloaded for non-commercial research and scholarly purposes. Copyright remains with the author.
File(s): 
Senior supervisor: 
Luba Petersen
Brian Krauth
Department: 
Arts & Social Sciences: Department of Economics
Thesis type: 
(Project) M.A.
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