Macroeconomic expectations and Fed's Dual Mandate

In this project, we investigate behavioral biases in how individuals assess the Fed’s success in its dual mandate. We focus on two events: A (the Fed will achieve an inflation level equal to or less than its 2025 projections) and B (the Fed will achieve an unemployment level equal to or less than its 2025 projections).

We will elicit households’ probabilistic beliefs regarding the Fed’s dual mandate. Specifically, we will ask participants to indicate individual probabilities that inflation and unemployment will be at or below the Fed’s projections for 2025 (i.e., Pr(A) and Pr(B)). We will collect both individual and joint probabilities (i.e., Pr(A or B) and Pr(A and B)). We will then compare individual probabilities with joint probabilities to detect various behavioral biases, such as the conjunction bias (Pr(A and B) > min[Pr(A), Pr(B)]) or the disjunction bias (Pr(A or B) < max[Pr(A), Pr(B)]). Following Benjamin (2019), we will also construct measures of representativeness bias. Additionally, we will employ the framework of Costello and Watts (2014) to assess probability coherence (probabilistic beliefs are coherent if Pr(A) + Pr(B) - Pr(A and B)-Pr(A or B)=0).

In the monetary policy context, conjunction bias may indicate overestimating the Fed’s ability to simultaneously achieve low inflation and low unemployment. In turn, disjunction bias may suggest that individuals perceive inflation and unemployment as so intertwined that success in one implies failure in the other, revealing pessimism about the Fed’s success in its dual mandate.

We will elicit both priors and posteriors, and in between, we will provide information treatments. The Baseline condition will show the Fed’s latest statement about its monetary policy goals. The TrumpFedFeud treatment will also present a short prompt about President Trump’s criticism of the Fed Chair and his policies on top of the baseline information. The TrumpTrade and TrumpTax treatments will highlight recent trade and tax policy controversies in addition to the baseline information, respectively.

Benjamin, D. J. (2019). Errors in probabilistic reasoning and judgment biases. Handbook of Behavioral
Economics: Applications and Foundations 1, 2:69–186.

Costello, F. and Watts, P. (2014). Surprisingly rational: probability theory plus noise explains biases in
judgment. Psychological review, 121(3):463.