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.