Abstract
AbstractWe study the revision of survey expectations in response to macroeconomic shocks, which we identify in vector autoregressive models with sign restrictions. We find that survey respondents distinguish between movements along the Phillips curve and shifts of the Phillips curve, depending on the type of shock that hits the economy. In addition, interest rate expectations are revised broadly in line with a Taylor rule. Consistent with models of rational inattention, macroeconomic shocks account for a small share of the forecast error variance of survey measures elicited from consumers, while they are more relevant for the expectations of professional forecasters.
Highlights
We study the revision of survey expectations in response to macroeconomic shocks, which we identify in vector autoregressive models with sign restrictions
We see that survey respondents reduce planned consumption in response to adverse shocks, where the results for the monetary policy (MP) shock are only significant when we explicitly control for recessions. These results suggest that respondents revise their expectations in line with a movement along the Phillips curve after aggregate demand (AD) shocks and that aggregate supply (AS) shocks are viewed as shifts of the Phillips curve
How do people interpret macroeconomic shocks? We find that survey respondents interpret AD and AS shocks largely in line with the predictions of standard theory
Summary
We use survey data from the Michigan Survey and from the SPF. In the Michigan Survey the respondents are households and the survey answers should be indicative for how consumers view economic developments. While we primarily consider data obtained from the Michigan Survey, we conduct the analysis using data from the SPF to see how consumers perceive macroeconomic developments in comparison to financial and economic experts. We use point estimates obtained from answers to the following two questions:. Panel D shows that people, on average, plan to increase current consumption spending despite the pessimistic overall outlook for the economy These results are consistent with the view that borrowing costs are currently perceived as favorable relative to expected future developments. 8. Bachmann, Berg, and Sims (2015) use this question to study the influence of expected inflation on consumption plans at the zero-lower-bound. Respondents expect the unemployment rate to go up and the inflation rate and the T-Bill rate to go down These dynamics correspond to the pattern that we have obtained with consumer data from the Michigan Survey, discussed above
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