The tale of two expectations

The tale of two expectations This paper aims to shed some light on the way lay consumers forecast by comparing survey expectations on two different—but linked—fundamentals. Specifically, we study the central tendencies and cross-sectional dispersions of predictions on individual-level and aggregate income dynamics. The proposed joint analysis highlights several interesting outcomes. Agents’ predictions on micro and macroeconomic evolutions do not drift apart despite (possibly composite) shocks have permanent effects on expectations. When shocks create a gap between the two expectations, in fact, individuals revise only forecasts about GDP dynamics. Otherwise stated, predictions on personal stances are much stickier. With respect to these latter, then, expectations on aggregate dynamics overreact to shocks and, amazingly from an objective standpoint, they are systematically bleaker. As per second moments evidence shows, in sharp contrast with the typical assumption maintained in the macroeconomic literature, that disagreement among agents is persistently high. Moreover, the comparison makes astonishingly clear that when predicting the same macro fundamental the consensus is even lower. Finally, our setting allows testing whether cross sectional disagreement and time series volatility in expectations are equal. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Quality & Quantity Springer Journals

The tale of two expectations

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Publisher
Springer Netherlands
Copyright
Copyright © 2015 by Springer Science+Business Media Dordrecht
Subject
Social Sciences; Methodology of the Social Sciences; Social Sciences, general
ISSN
0033-5177
eISSN
1573-7845
D.O.I.
10.1007/s11135-015-0283-0
Publisher site
See Article on Publisher Site

Abstract

This paper aims to shed some light on the way lay consumers forecast by comparing survey expectations on two different—but linked—fundamentals. Specifically, we study the central tendencies and cross-sectional dispersions of predictions on individual-level and aggregate income dynamics. The proposed joint analysis highlights several interesting outcomes. Agents’ predictions on micro and macroeconomic evolutions do not drift apart despite (possibly composite) shocks have permanent effects on expectations. When shocks create a gap between the two expectations, in fact, individuals revise only forecasts about GDP dynamics. Otherwise stated, predictions on personal stances are much stickier. With respect to these latter, then, expectations on aggregate dynamics overreact to shocks and, amazingly from an objective standpoint, they are systematically bleaker. As per second moments evidence shows, in sharp contrast with the typical assumption maintained in the macroeconomic literature, that disagreement among agents is persistently high. Moreover, the comparison makes astonishingly clear that when predicting the same macro fundamental the consensus is even lower. Finally, our setting allows testing whether cross sectional disagreement and time series volatility in expectations are equal.

Journal

Quality & QuantitySpringer Journals

Published: Nov 20, 2015

References

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