Expectations as a source of macroeconomic persistence: an exploration of firms' and households' expectation formation

Jeffrey Fuhrer

No 15-5, Working Papers from Federal Reserve Bank of Boston

Abstract: While there is little question that expectations lie at the heart of much economic decision-making, and therefore at the heart of models of the macroeconomy that hope to reflect such decision-making, how such expectations are formed is an open research question. In earlier work, Fuhrer (2015) showed that empirical estimates of a standard dynamic stochastic general equilibrium (DSGE) model preferred inertia in expectations over price indexation or habit formation as a mechanism to explain the persistence of aggregate time series for output, inflation, and interest rates. A question left open in that paper was why and how expectations might exhibit such inertia. This paper examines the expectations behavior of individual responses in the surveys of the Survey of Professional Forecasters (SPF) and the University of Michigan's Survey Research Center to shed light on that question.

Keywords: persistence; rational expectations; survey expectations (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-05-18
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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