Household attention gates monetary policy transmission to beliefs
A Federal Reserve Bank of Atlanta working paper finds that monetary policy transmission to household beliefs is state-dependent, as households endogenously adjust attention to macroeconomic conditions. Policy news primarily moves inflation beliefs among attentive households.
Attention shapes belief responses
The paper presents four main findings on the transmission of monetary policy to household beliefs.
First, monetary policy shocks primarily affect inflation expectations among attentive households—those whose prior assessments of business conditions closely matched realized macroeconomic outcomes.
Non-attentive households, conversely, show near-zero belief responses.
Second, aggregate pass-through varies with economy-wide attentiveness, with contractionary policy shocks generating larger downward revisions in inflation expectations during high-attention periods.
Third, this expectations multiplier is state-dependent, strengthening markedly in recessions and periods of elevated real or financial uncertainty, reflecting endogenous increases in attention.
Fourth, conditional on attention, belief responses are largest among households with greater economic exposure, such as stockholders, homeowners, and higher-stakes demographic groups.
These groups disproportionately transmit monetary policy into aggregate expectations, also influencing labor-market and durable-spending outlooks, amplifying perceived real interest rates.
Modeling attention, measuring impact
The paper develops a minimal behavioral framework, following Gabaix (2020), where households endogenously choose attention prior to the arrival of shocks.
Attention balances forecast accuracy against cognitive costs and rises when macroeconomic risks increase.
This model implies that monetary policy operates through an expectations multiplier.
The authors test these predictions using the Michigan Survey of Consumers and externally identified monetary policy shocks.
They construct a predetermined measure of household attentiveness by comparing respondents' assessments of recent business conditions against realized macroeconomic outcomes, identifying attentive households before policy news arrives.
This measure is driven by the aggregate macroeconomic state, such as unemployment and financial stress, rather than personal circumstances.
A crucial, nuanced insight
This paper provides a crucial micro-level understanding of monetary policy transmission, highlighting the importance of household attention.
Its findings explain empirical inconsistencies in the expectations channel and offer a more nuanced view of policy effectiveness.
For central banks, this suggests communication strategies might need to be tailored to different states of the economy.