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

Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar and Jane Ryngaert

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

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.

Keywords: Basic Behavioral and Social Science; Behavioral and Social Science; Economics (search for similar items in EconPapers)
Date: 2021-06-30
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Citations: View citations in EconPapers (32)

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