How Do Expectations about the Macroeconomy Affect Personal Expectations and Behavior?

Abstract

Using a representative online panel from the US, we examine how individuals' macroeconomic expectations causally affect their personal economic prospects and their behavior. To exogenously vary respondents' expectations, we provide them with different professional forecasts about the likelihood of a recession. Respondents update their macroeconomic outlook in response to the forecasts, extrapolate to expectations about their personal economic circumstances and adjust their consumption plans and stock purchases. Extrapolation to expectations about personal unemployment is driven by individuals with higher exposure to macroeconomic risk, consistent with macroeconomic models of imperfect information in which people are inattentive, but understand how the economy works.

Beliefs About Public Debt and the Demand for Government Spending

“…Assuming that the immediate learning rate was similar in Experiment 2 on MTurk, this implies a recall rate of about one third after four weeks. This magnitude is in line with the persistence of updating documented by previous literature in the context of macroeconomic expectations (Armantier et al, 2016;Coibion et al, 2018;Fuster et al, 2019;Roth and Wohlfart, 2019), which we summarize in Table A.20 in the online appendix. Columns 2-4 of Table A.18 show that our estimated learning rate is robust to the specification used e.g.…”

“…3 Part of this literature provides indirect evidence on voters' concerns about government debt. On the one hand, reducing government debt could be punished by voters because of its contractionary effect Giuliano and Spilimbergo, 2014;Roth and Wohlfart, 2018;Weinzierl, 2017). 3 Battaglini et al (2018) provide evidence from a laboratory experiment which studies political distortions in the accumulation of public debt.…”

“…Finally, our study relates to a literature using survey methods to study people's mental model of the economy. Existing evidence suggests that people are inattentive to macroeconomic conditions such as inflation, house prices and income, and have a rough but imperfect understanding of macroeconomic relationships (Andre et al, 2019;Armona et al, 2019;Coibion et al, 2018;Fuster et al, 2019;Kumar et al, 2015;Roth and Wohlfart, 2019). In the context of public debt, the assumption that consumers understand the intertemporal government budget constraint is at the core of many macroeconomic models and is one of the key assumptions underlying the Ricardian Equivalence Theorem (Barro, 1974).…”

“…If the individual does not make the typo again in the posterior belief elicitation it will look like she is learning from a signal she has never received. For comparison of our estimated coefficient β3, see for instanceTable A.18 inRoth and Wohlfart (2019). Following our pre-analysis-plan, all beliefs are winsorized at 200.…”

IQ, Expectations, and Choice

“…They only survey elderly populations, they are run every two years, which makes studying the process of updating expectations over time difficult, and they only include questions about individual expectations such as retirement age and longevity. Observing macroeconomic expectations is crucial to understanding whether any effects of limited cognition might 1 See also Landier, Ma, and Thesmar (2018), , Gennaioli, Ma, and Shleifer (2018), Armantier, Bruine de Bruin, Topa, Klaauw, and Zafar (2015), Crump, Eusepi, Tambalotti, and Topa (2018), Bachmann, Berg, and Sims (2015), Glaeser and Nathanson (2017), Fuster, Perez-Truglia, Wiederholt, and Zafar (2018), Malmendier and Nagel (2016), Roth and Wohlfart (2018), D 'Acunto, Hoang, and Weber (2019), Das, Kuhnen, and Nagel (2017), D 'Acunto, Malmendier, Ospina, and Weber (2019), D 'Acunto, Malmendier, and Weber (2019), Fuster, Kaplan, and Zafar (2018), Andre, Pizzinelli, Roth, and Wohlfart (2019), Vellekoop and Wiederholt (2017), and Ben-David, Fermand, Kuhnen, and Li (2018). matter for aggregate outcomes and for the effectiveness of policies that operate through managing such expectations.…”