Intrinsic Expectations Persistence: Evidence from Professional and Household Survey Expectations 
In current macroeconomic models, economic decisions—about prices, capital goods, consumer durable goods, housing, life-cycle savings choices, and monetary policy—inherently depend on expectations about future economic conditions. But exactly how economic actors form their expectations remains an open research question.
Mounting evidence suggests that rational expectations may not be the best assumption to embed in macroeconomic models. Several papers have explored alternative expectations assumptions and their implications for economic outcomes, but relatively few have examined in detail the expectations behavior of individual economic agents; most use aggregated measures of expectations from available surveys.
In contrast, this paper examines a rich set of micro-data evidence on the expectations behavior of firms and households. Specifically, it studies the expectations behavior of individual responses in the Philadelphia Fed’s Survey of Professional Forecasters (SPF), the University of Michigan’s Survey Research Center survey of consumers, and the ECB Survey of Professional Forecasters (ESPF)
This paper is motivated by the author’s observation in an earlier paper (Fuhrer 2017) that aggregated expectations from the SPF appear to significantly improve the performance of standard dynamic macroeconomic models. While that paper provides an internally consistent way of describing expectations behavior, it does not answer the fundamental question of why survey expectations appear to account for a significant portion of the persistence found in macroeconomic data. This paper uses the individual responses in the SPF, ESPF, and the Michigan survey of consumers to better understand the sources of that persistence.
Key Findings
- Professional and household forecasters inefficiently revise their forecasts, significantly underreacting to new information. As a consequence, revisions smooth through arriving information, and expectations forget past information at a rapid rate and appear to anchor to the unconditional mean or other salient anchors.
- This result holds for all of the surveys at all forecast horizons for inflation, unemployment, short-term and long-term interest rates, and real growth, and is quantitatively and statistically significant.
Implications
Examining the micro-data evidence bearing on the hypotheses tested by Coibion and Gorodnichenko (2015), who suggest that aggregate surveys may conform to key predictions of the sticky-information model of Mankiw and Reis (2002) and/or the noisy-information model of Maćkowiak and Wiederholt (2009), this paper finds considerably less coherence with those models. It also provides evidence that distinguishes this behavior from learning, suggesting that the inefficient incorporation of information is much more important quantitatively than least-squares learning in these expectations measures.
This paper provides a micro-data-based foundation for the author’s finding in an earlier paper (Fuhrer 2017) that intrinsic persistence in expectations may be a key source of macroeconomic persistence. It presents a model in which economic agents’ inefficient updating of expectations induces excess smoothness in expectations, imparting persistence to macro variables that is due strictly to the expectations formation process.
While the micro-data results appear quite robust, their implications for macroeconomic dynamics no doubt merit further investigation; this paper provides only simple examples of the possible implications of such expectations behavior in macro models. However, coupled with earlier work, it suggests that micro-data-based expectations that exhibit these kinds of inefficiencies indeed induce significant persistence into dynamic macro models, and thus might go far in explaining much of the persistence observed in macro data.
Abstract
This paper examines the expectations behavior of individual responses in the Survey of Professional Forecasters, the University of Michigan’s Survey Research Center survey of consumers, and the ECB Survey of Professional Forecasters. It finds that the most robust feature of all of these expectations measures is that respondents inefficiently revise their forecasts, significantly underreacting to new information. As a consequence, revisions smooth through arriving information, and expectations forget past information at a rapid rate and appear to anchor to the unconditional mean or other salient anchors. The paper then examines the micro-data evidence bearing on the hypotheses tested by Coibion and Gorodnichenko (2015), who suggest that aggregate surveys may conform to key predictions of the sticky-information model of Mankiw and Reis (2002) and/or the noisy-information model of Maćkowiak and Wiederholt (2009). This paper finds considerably less coherence with these models in the micro data. The paper also provides evidence that distinguishes this behavior from learning, suggesting that the inefficient incorporation of information is much more important quantitatively than least-squares learning in these expectations measures. Finally, this empirical regularity may bear important implications for macroeconomic dynamics, as illustrated in the last sections of the paper, as it provides a micro-based foundation for an earlier paper’s finding that intrinsic persistence in expectations may be a key source of macroeconomic persistence (Fuhrer 2017). The paper sketches a model in which agents’ inefficient updating of expectations induces excess smoothness in expectations, imparting persistence to macro variables that is due strictly to the expectations formation process.