What The General Public Knows About Monetary Policy

by Carin van der Cruijsen, David-Jan Jansen and Jakob de Haan

Appeared originally at Voxeu.org

Central banks have typically targeted their communication at financial markets. Increasingly, however, many have started actively communicating with the general public.

Using Dutch survey data, this column finds that the public’s knowledge of monetary policy objectives is far from perfect, and varies widely across respondents. Those with a greater understanding of ECB objectives tend to form more realistic inflation expectations. Central banks seeking to target the general public must take account of discrepancies in households’ knowledge of and interest in monetary policy.

Central banks are increasingly using communication as an integral element of monetary policy. While initially financial markets were the main audience, in recent years there has been increasing attention paid to communicating with the general public. The reason is that the effects of monetary policy largely operate through expectations, and that the set of relevant actors also includes the household sector. For instance, expectations about the economic outlook can be an important determinant of the consumption and investment decisions that households make on a daily basis (Blinder et al 2008).

How do households formulate expectations, and to what extent do they use information on monetary policy in this process? Recent evidence finds that only some US households form expectations that are consistent with a Taylor rule (Carvalho and Nechio 2014). In forthcoming work, we corroborate this evidence, but use a more direct approach (Van der Cruijsen et al 2015). We use survey data to directly assess what households know about the monetary policy of the European Central Bank (ECB) and how they acquire their information.

Knowledge about monetary policy is far from perfect

A first conclusion in our paper is that households’ knowledge about the ECB’s policy objectives is far from perfect. The underlying analysis is based on a survey that we conducted among a representative sample of Dutch households. We presented participants with 11 statements on the ECB’s objectives, asking them to indicate whether they believed these statements to be true or false. Four of the statements are indeed true and based on the ECB’s actual objectives, while the remaining seven statements are false and were drafted by us.