Expectations as a Source of Macroeconomic Persistence: Evidence from Survey Expectations in Dynamic Macro Models
This paper finds that persistence intrinsic to expectations may explain a sizable fraction of the persistence in aggregate macroeconomic time series. The paper endogenizes survey expectations in an array of standard macroeconomic relationships and in a DSGE model. The use of survey measures of expectations—for near-term inflation, long-term inflation, near-term and long-term unemployment, and short-term interest rates—improves performance along a variety of dimensions. Survey expectations exhibit strong correlations to key macroeconomic variables. Using a minimal set of assumptions, those correlations may be given a structural interpretation in a DSGE context. Including survey expectations helps to identify key slope parameters in standard relationships, and nearly eliminates the need for lagged dependent variables in structural models that is often motivated by indexation for prices and habit formation for consumption. Including survey expectations also obviates the need for autocorrelated structural shocks in the key equations. The paper discusses the modeling complications that arise once the rational expectations assumption is abandoned, and proposes methods for endogenizing survey expectations in a general equilibrium macro model. Overall, the results suggest that much of the persistence in aggregate data is better accounted for by slow-moving expectations, rather than by habits, indexation and autocorrelated structural shocks.