Subjective Models of the Macroeconomy: Evidence from Experts and Representative Samples

Abstract

We study people's subjective models of the macroeconomy and shed light on their attentional foundations. To do so, we measure beliefs about the effects of macroeconomic shocks on unemployment and inflation, providing respondents with identical information about the parameters of the shocks and previous realizations of macroeconomic variables. Within samples of 6,500 U.S. households and 1,500 experts, beliefs are widely dispersed, even about the directional effects of shocks, and there are large differences in average beliefs between households and experts. Part of this disagreement seems to arise because respondents think of different propagation channels of the shocks, in particular demand- versus supply-side mechanisms. We provide evidence on the role of associative memory in driving heterogeneity in thoughts and forecasts: Contextual cues and prior experiences shape which propagation channels individuals retrieve and thereby which forecasts they make. Our findings offer a new perspective on the widely documented disagreement in macroeconomic expectations.

Keywords: Expectation Formation, Subjective Models, Associations, Thoughts, Attention, Experiences, Macroeconomic Shocks, Monetary Policy, Fiscal Policy.

JEL Classification: D83, D84, E31, E52, E71