Do You Know that I Know that You Know…? Higher-Order Beliefs in Survey Data*

Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar and Jane Ryngaert

The Quarterly Journal of Economics, 2021, vol. 136, issue 3, 1387-1446

Abstract: We implement a new survey of firms, focusing on their higher-order macroeconomic expectations. The survey provides a novel set of stylized facts regarding the relationship between first-order and higher-order expectations of economic agents, including how they adjust their beliefs in response to a variety of information treatments. We show how these facts can be used to calibrate key parameters of noisy-information models with infinite regress as well as to test predictions made by this class of models. We also consider a range of extensions to the basic noisy-information model that can potentially better reconcile theory and empirics. Although some extensions like level-k thinking are unsuccessful, incorporating heterogeneous long-run priors can address the empirical shortcomings of the basic noisy-information model.

Date: 2021
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Citations: View citations in EconPapers (27)

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