Finance and Economics Discussion Series (FEDS)
May 2024
Households' Preferences Over Inflation and Monetary Policy Tradeoffs
Damjan Pfajfar and Fabian Winkler
Abstract:
We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and unemployment. These preferences also exhibit sizable demographic heterogeneity.
Keywords: Household Survey, Attention, Inflation Target, Sacrifice Ratio, Dual Mandate
DOI: https://doi.org/10.17016/FEDS.2024.036
PDF: Full Paper
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