Monetary and fiscal policies affect the economy, but how they operate remains a point of contention. A common thread is the role of expectations: policies have powerful effects in large part because firms and households incorporate announcements about policies into their decision plans.
How powerful are these mechanisms in practice? Using a large-scale survey of US households during the Covid-19 pandemic, we examined how new information about policy responses affects the expectations and decisions of respondents. Specifically, we provided random subsets of participants with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures implemented by Congress, as well as recommendations for health safety from the US Center for Disease Control. We then characterized how people’s economic expectations and spending plans responded to these different sets of information. This allows us to assess the extent to which these policy announcements alter the beliefs and plans of economic agents—individuals and households.
By and large, we find very little effect of differences in the information that is provided on the people’s expectations about income, mortgage rates, inflation, or the unemployment rate. Nor do we find an effect on their own potential decisions, contrary to the powerful effects that macroeconomists usually assume. We argue that the most likely explanation for the absence of any effects is that households do not believe that the policy responses described in the treatments are effective: that is, they believe that the policies will essentially accomplish nothing. This may be because of information effects (i.e. the very fact that policies are being undertaken tells people that things are worse than they had believed) and that this negative response offsets any positive effects of a policy action.
We find a high degree of inattention on the part of households during the Covid-19 crisis to macroeconomic conditions; but we also document that this lack of understanding extends to information about the coronavirus. For example, when we ask households what they think the recovery rate is once someone is infected with Covid-19, they report an average answer of 73%, far lower than the 97% reported by the World Health Organization.
Despite this pessimism about the virus, we find very small effects of providing information about its deadliness and ease of spread on households’ economic expectations. When respondents are provided information that, on average, the disease is harder to spread and less deadly than they had originally thought, their views about future inflation, mortgage rates, and unemployment are effectively unchanged, as are their expected future incomes or desires to purchase new durable goods. Providing information about fiscal, monetary, or health policies similarly does very little to the expectations of households, both about the aggregate economy and about their own income. This suggests that policy responses are unlikely to have very large effects, since forces operating through people’s expectations have been effectively shut down by the uncertainties created by the pandemic.
© Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber
Olivier Coibion, is an assistant professor of economics at UT Austin and is also affiliated with NBER.
Yuriy Gorodnichenko is Quantedge Presidential Professor of Economics at UC Berkeley and a faculty research associate at NBER.
Michael Weber is an associate professor at the University of Chicago Booth School of Business and a faculty research fellow at NBER.
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