The Epidemiology of Macroeconomic Expectations

Abstract

Macroeconomists have long emphasized the importance of expectations in determining macroeconomic outcomes, and an enormous theoretical literature has developed examining many models of expectations formation. This paper proposes a new approach, based on epidemiological models, in which only a small set of agents (professional forecasters) formulate their own expectations, which then spread through the population via the news media in a manner analogous to the spread of a disease. The paper shows that the very simplest epidemiological model, called the ‘common source’ model, does a good job of explaining the dynamics of inflation and unemployment expectations, and more complicated epidemiological models produce dynamics similar to those that emerge from the common source model.