Imperfect Macroeconomic Expectations: Evidence and Theory

George-Marios Angeletos, Zhen Huo and Karthik A. Sastry

No 27308, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document a new fact about expectations: in response to the main shocks driving the business cycle, expectations underreact initially but overshoot later on. We show how previous, seemingly conflicting, evidence can be understood as different facets of this fact. We finally explain what the cumulated evidence means for macroeconomic theory. There is little support for theories emphasizing underextrapolation or two close cousins of it, cognitive discounting and level-K thinking. Instead, the evidence favors the combination of dispersed, noisy information and over-extrapolation.

JEL-codes: E03 E3 E7 G02 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-mac and nep-ore
Note: AP EFG ME
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Published as Imperfect Macroeconomic Expectations: Evidence and Theory , George-Marios Angeletos, Zhen Huo, Karthik A. Sastry. in NBER Macroeconomics Annual 2020, volume 35 , Eichenbaum and Hurst. 2021

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Journal Article: Imperfect Macroeconomic Expectations: Evidence and Theory (2021)
Chapter: Imperfect Macroeconomic Expectations: Evidence and Theory (2020)
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