Working Paper: NBER ID: w8695
Authors: Christopher D. Carroll
Abstract: Since the foundational work of Keynes (1936), macroeconomists have emphasized the importance of agents' expectations in determining macroeconomic outcomes. Yet in recent decades macroeconomists have devoted almost no effort to modeling actual empirical expectations data, instead assuming all agents' expectations are 'rational.' This paper takes up the challenge of modeling empirical household expectations data, and shows that a simple, standard model from epidemiology does a remarkably good job of explaining the deviations of household inflation and unemployment expectations from the `rational expectations' benchmark. Furthermore, a microfoundations or 'agent-based' version of the model may be able to explain, in a way that still permits aggregation, stark rejections of the pure rational expectations framework like Souleles's (2002) finding that members of different demographic groups have sharply different predictions for macroeconomic aggregates like the inflation rate.
Keywords: No keywords provided
JEL Codes: E0; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exposure to news articles about inflation (E31) | Household expectations (D19) |
| Inflation-related news (E31) | Adjustment of individual expectations (D84) |
| News coverage intensity (L82) | Closeness of household expectations to rational forecasts (D80) |
| Exposure to news articles about inflation (E31) | Convergence towards rational expectations (D84) |
| Inflation-related news (E31) | Shift in aggregate expectations of the population (D84) |