Subjective Models of the Macroeconomy: Evidence from Experts and a Representative Sample

113 Pages Posted: 14 Oct 2019

See all articles by Peter Andre

Peter Andre

University of Bonn

Carlo Pizzinelli

University of Oxford

Christopher Roth

University of Warwick, Faculty of Social Studies, Department of Economics, Students

Johannes Wohlfart

University of Copenhagen

Multiple version iconThere are 3 versions of this paper

Date Written: 2019

Abstract

We propose a method to measure people's subjective models of the macroeconomy. Using a sample of 2,200 households representative of the US population and a sample of more than 1,000 experts, we measure beliefs about how the unemployment rate and the inflation rate respond to four different hypothetical exogenous shocks: a monetary policy shock, a government spending shock, an income tax shock, and an oil price shock. While expert predictions are quantitatively close to benchmarks from standard DSGE models and VAR evidence and relatively homogeneous, there is strong heterogeneity among households. Households predict changes in unemployment that are largely in line with the experts' responses for all four shocks. However, their predictions of changes in inflation are at odds with those of experts both for the tax shock and the interest rate shock. We show that a substantial fraction of deviations of household predictions from expert predictions can be explained by the use of a simple heuristic according to which people expect a positive co-movement among variables they perceive as good and among variables they perceive as bad. Our findings inform the validity of central assumptions about the expectation formation process and have important implications for the optimal design of fiscal and monetary policy.

Keywords: expectation formation, subjective models, macroeconomic shocks, monetary policy, fiscal policy

JEL Classification: D120, D140, D830, D840, E320, G110

Suggested Citation

Andre, Peter and Pizzinelli, Carlo and Roth, Christopher and Wohlfart, Johannes, Subjective Models of the Macroeconomy: Evidence from Experts and a Representative Sample (2019). CESifo Working Paper No. 7850. Available at SSRN: https://ssrn.com/abstract=3467984

Peter Andre (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Carlo Pizzinelli

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Christopher Roth

University of Warwick, Faculty of Social Studies, Department of Economics, Students ( email )

Coventry, CV4 7AL
United Kingdom

Johannes Wohlfart

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
21
Abstract Views
137
PlumX Metrics