Chapter 10 - Consumer expectations and the macroeconomy

Abstract

This Chapter provides an overview of the growing literature on eliciting and using subjective expectations data in economics. Expectations are a key component of any model of decision-making under uncertainty, and drive economic choices by agents in a broad variety of realms. They are also carefully monitored by practitioners, financial market participants, and policy-makers—for instance in the conduct of monetary policy. Economists have traditionally been reluctant to collect and use direct data on expectations. This has changed over the last three decades, with researchers increasingly collecting quantitative measures of subjective expectations and eliciting the entire subjective probability distribution over future outcomes for a variable of interest. Expectations data are consistent with basic rules of probability, are predictive of realized outcomes, and are informative in the sense of exhibiting patterns that are consistent with theory. Subjective expectations data can be integrated in the analysis of structural models of behavior, reducing model misspecification and allowing researchers to better construct counterfactual experiments.