This paper argues for a careful (re)consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses. While ...the rational expectations revolution has allowed for great leaps in macroeconomic modeling, the surveyed empirical microevidence appears increasingly at odds with the full-information rational expectation assumption. We explore models of expectation formation that can potentially explain why and how survey data deviate from full-information rational expectations. Using the New Keynesian Phillips curve as an extensive case study, we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full-information rational expectations.
We propose a new approach to test the full-information rational expectations hypothesis which can identify whether rejections of the null arise from information rigidities. This approach quantifies ...the economic significance of departures from the null and the underlying degree of information rigidity. Applying this approach to US and international data of professional forecasters and other agents yields pervasive evidence consistent with the presence of information rigidities. These results therefore provide a set of stylized facts which can be used to calibrate imperfect information models. Finally, we document evidence of state-dependence in the expectations formation process.
SENTIMENTS Angeletos, George-Marios; La'O, Jennifer
Econometrica,
March 2013, Letnik:
81, Številka:
2
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This paper develops a new theory of fluctuations—one that helps accommodate the notions of "animal spirits" and "market sentiment" in unique-equilibrium, rational-expectations, macroeconomic models. ...To this goal, we limit the communication that is embedded in a neoclassical economy by allowing trading to be random and decentralized. We then show that the business cycle may be driven by a certain type of extrinsic shocks which we call sentiments. These shocks formalize shifts in expectations of economic activity without shifts in the underlying preferences and technologies; they are akin to sunspots, but operate in unique-equilibrium models. We further show how communication may help propagate these shocks in a way that resembles the spread of fads and rumors and that gives rise to boom-and-bust phenomena. We finally illustrate the quantitative potential of our insights within a variant of the RBC model.
We analyze time series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each ...other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.
Investors' subjective capital gains expectations are a key element explaining stock price fluctuations. Survey measures of these expectations display excessive optimism (pessimism) at market peaks ...(troughs). We formally reject the hypothesis that this is compatible with rational expectations. We then incorporate subjective price beliefs with such properties into a standard asset-pricing model with rational agents (internal rationality). The model gives rise to boom-bust cycles that temporarily delink stock prices from fundamentals and quantitatively replicates many asset-pricing moments. In particular, it matches the observed strong positive correlation between the price dividend ratio and survey return expectations, which cannot be matched by rational expectations.
Reference Points and Effort Provision Abeler, Johannes; Falk, Armin; Goette, Lorenz ...
The American economic review,
04/2011, Letnik:
101, Številka:
2
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A key open question for theories of reference-dependent preferences is: what determines the reference point? One candidate is expectations: what people expect could affect how they feel about what ...actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based, reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.
We propose a novel but intuitive measure of the average ex post accuracy of a group of economic agents’ beliefs, and show how a decomposition of that measure captures different sources of inaccuracy: ...failure of rational expectations, subjective uncertainty, and aggregate shocks.
•Inaccurate beliefs lead to poor choices and undesirable outcomes.•Probabilistic expectations data provide an opportunity to study beliefs.•We propose a novel measure of the ex post accuracy of economic agents’ beliefs.•A decomposition of that measure captures different sources of inaccuracy.•Students’ income expectations become much more accurate during college.
We study how different forms of communication influence inflation expectations in a randomized controlled trial using nearly 20,000 US individuals. We elicit individuals’ inflation expectations and ...then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading news articles about the most recent FOMC meetings results in a forecast revision that is smaller by half. This exogenous variation in inflation expectations has subsequent effects on household spending reported in scanner and survey data.
A large body of empirical evidence suggests that beliefs systematically deviate from perfect rationality. Much of the evidence implies that economic agents tend to form forecasts that are excessively ...influenced by recent changes. We present a parsimonious quasi-rational model that we call natural expectations, which falls between rational expectations and (naïve) intuitive expectations. (Intuitive expectations are formed by running growth regressions with a limited number of right-hand-side variables, and this leads to excessively extrapolative beliefs in certain classes of environments). Natural expectations overstate the long-run persistence of economic shocks. In other words, agents with natural expectations turn out to form beliefs that don't sufficiently account for the fact that good times (or bad times) won't last forever. We embed natural expectations in a simple dynamic macroeconomic model and compare the simulated properties of the model to the available empirical evidence. The model's predictions match many patterns observed in macroeconomic and financial time series, such as high volatility of asset prices, predictable up-and-down cycles in equity returns, and a negative relationship between current consumption growth and future equity returns.
This study seeks to better understand why some individuals decide to start new businesses and others do not, particularly in light of high base rates of failure. In addressing the question of “Why do ...some individuals choose to start new ventures?” a common perspective is that potential entrepreneurs with high levels of confidence in potential outcomes are likely to start new ventures. Alternatively, it also may be that firm creation decisions are based largely on individual expectations of one's ability. Hypotheses examining these perspectives are tested using a sample of 316 nascent entrepreneurs with the start-up decision tracked longitudinally. The results indicate that confidence in one's ability to perform tasks relevant to entrepreneurship is a robust predictor of start-up while outcome expectancies appear to play a marginal role. Theoretical and practical implications stemming from these results are discussed.
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