Subjective Models of the Macroeconomy and the Transmission of Monetary Policy

Francesco D'Acunto, Dimitris Georgarakos, Geoff Kenny and Michael Weber

No 21959, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Standard macroeconomic theories assume that representative or heterogeneous agents share a common model of how the economy operates. Yet evidence shows that households hold heterogeneous subjective models-distinct beliefs about how macroeconomic variables interact. As a result, identical shocks or policies may elicit different responses from otherwise similar households. We test this hypothesis by measuring subjective models and investigating their role in the transmission of monetary policy to consumption embedding randomized controlled experiment in a large-scale, multi-country survey. Consumers who believe that monetary tightening primarily operates through its effects on borrowing or savings rates plan to reduce consumption more in response to randomly assigned rate increase scenarios. By contrast, those who think about inflation or general equilibrium effects adjust consumption less. These differences are not explained by demographics, financial characteristics, including mortgage holdings and mortgage type, or country-level factors. Households’ actual consumption responses to endogenous policy-rate changes exhibit broadly similar patterns. Our findings stress that heterogeneity in subjective models is an overlooked determinant of monetary policy transmission.

Keywords: Behavioural macroeconomics; Household finance; Consumption; Mortgages; Subjective expectations; Heterogeneous agents; Randomized controlled trial (search for similar items in EconPapers)
JEL-codes: D15 D91 E21 E43 E52 E71 (search for similar items in EconPapers)
Date: 2026-09
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