Macroeconomic Expectations Research Articles

A Fundamental Connection: Exchange Rates and Macroeconomic Expectations

Abstract We disprove the exchange rate macroeconomic disconnect puzzle by showing that macroeconomic news can explain most variation in exchange rates at monthly and quarterly frequencies, accounting for up to 91 percent of the quarterly exchange rate variation during US recessions and 65 percent over all periods. The main driver of the reconnect is exchange rates responding to past news—a result inconsistent with the theory of uncovered interest rate parity under full information rational expectations (UIP-FIRE). We discuss theoretical models that can explain this surprising result, including models featuring currency risk premia, regulatory or institutional frictions, or deviation from FIRE.

Macroeconomic perceptions, financial constraints, and anomalies

This paper studies the heterogeneous effects of subjective macroeconomic expectations on the cross-section of equity returns. We argue that an upward revision in expectations of macroeconomic productivity might be accompanied by an excessive increase in investment and external financing, inflated current equity prices, and thus lowered subsequent returns, particularly for financially constrained firms. Thus, following upward revisions in expectations of macroeconomic productivity, subsequent returns are relatively low for small firms, value firms, low-investment firms, risky firms, unprofitable firms, low-quality firms, and financially distressed firms—all of which are more financially constrained. In sharp contrast, following downward revisions in expectations of macroeconomic productivity, these categories of firms earn relatively high subsequent returns. We find that revisions in subjective macroeconomic expectations induce strong predictable time variation in a large set of anomalies. In particular, favorable revisions in expectations of macroeconomic productivity predict significantly stronger profitability, quality, distress, and low-risk anomalies but weaker value, investment, and size anomalies.

Expectations, sentiments and capital flows to emerging market economies

This paper provides a novel look at capital flow determinants by assessing the role of expectations and media sentiments. Analyzing eight emerging market economies, we assess the effects of macroeconomic expectations and disagreement among professionals and various media-based sentiment indicators. Our results show that survey and sentiment indicators which are available in real time contain useful information about capital flow dynamics which go beyond the effects of conventional push and pull factors for all countries we analyze. News sentiment related to the exchange rate have the strongest effects on capital flows. Finally, we identify substantial heterogeneity across countries.

Forecaster (Mis-)Behavior

Abstract We document two stylized facts in expectational data. First, professional forecasters overrevise their macroeconomic expectations. Second, such overrevisions mask evidence of both over- and underreactions to public signals. We show that the first fact is inconsistent with standard models of noisy rational expectations, but consistent with behavioral and strategic models. The second fact, in contrast, presents a puzzle for existing theories. We propose an extension of noisy rational expectations that allows forecasters to be overconfident in their information. We show that this feature when combined with the endogeneity of public signals leads to over- and undereactions consistent with the data.

The Macroeconomic Expectations of U.S. Managers

AbstractUsing responses obtained through the Nielsen Homescan panel survey, we explore the differences between managers’ and nonmanagers’ expectations and perceptions of inflation and unemployment. By and large, managers and nonmanagers exhibit similar average inflation and unemployment expectations as well as similar levels of disagreement and sensitivity to information provided in a randomized control trial. Responses to hypothetical questions suggest that inflation expectations of managers frequently affect their economic decisions. Finally, the inflation expectations of managers deviate systematically from the predictions of “anchored” expectations.

Macroeconomic Expectations and Expected Returns

Macroeconomic Expectations and Expected Returns

Extrapolative Uncertainty and Household Economic Behavior

We examine the uncertainty in households’ expectations regarding macroeconomic outcomes, namely inflation and the rate of nationwide home price growth. We document that people extrapolate from the instability of their personal and local environment when assessing the future volatility of these macroeconomic variables. Consequently, there are within-person spillovers in subjective uncertainty regarding different economic outcomes. This extrapolative behavior is more pronounced among lower-numeracy individuals, and it persists throughout the business cycle. People with more uncertain macroeconomic expectations are more likely to engage in precautionary behaviors regarding consumption and equity market exposure and are more concerned about credit market access. This paper was accepted by David Simchi-Levi, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.00820 .

Tools of regime stability: the political economy of sovereign wealth funds in Gulf rentier states

Why have Gulf resource-dependent countries transformed the role of their sovereign wealth funds (SWFs) from passive global investors to ubiquitous drivers of economic development? How does this role-change operate amidst fiscal scarcity, confounding macroeconomic expectations of commodity-based SWFs? Beyond a narrow view of funds as apolitical economic actors, this article puts forward the logic of SWFs as tools of regime stability to explain SWF development in Gulf rentier states. This logic advances that SWFs are adaptive strategies through which rentier states respond to evolving external pressure without compromising the fundamental pillars of regime stability underpinning allocative frameworks. Drawing on the Saudi case, the article finds that SWFs create de-risking pathways to mobilize private finance capital through environmental, social and governance (ESG) practices and market-based instruments like green bonds. Simultaneously, SWFs allow incumbents to revisit rentier governance by enhancing economic steering capacity while upholding, but restructuring, patronage networks. By shedding light on the political role of SWFs, this article contributes to debates surrounding rentier states and financialization literatures. It highlights how the elasticity of rentierism as financialized forms of state-led economic development does not erode state capacity but rather empowers ruling elites with a new range of tools and resources to upgrade rentier governance in times of economic transitions.

Research on the Correlation between the Exchange Rate of Offshore RMB and the Stock Index Futures

The offshore RMB exchange rate is affected by the supply and demand relationship in the international market, investor sentiment, market liquidity, and other factors, while the onshore RMB exchange rate is mainly affected by government regulation and intervention. Therefore, the offshore RMB exchange rate may be a better reflection of the market’s macroeconomic expectations and risk appetite for China. Stock index futures are mainly affected by macroeconomic factors, so studying the correlation between the offshore RMB exchange rate and stock index futures is helpful for risk management, hedging, and price discovery. In this study, we selected the offshore RMB exchange rate, the volume of stock index futures, and the absolute rate of return as variables of investor sentiment. Through the Granger causality test, impulse response function, and variance decomposition, we studied the correlation between the rate of return of stock index futures and the rate of return of the offshore RMB exchange rate. Furthermore, we constructed a GARCH conditional volatility model. It was concluded that the trading volume and the absolute rate of return of stock index futures could explain the price fluctuations of stock index futures very well. A change in the offshore RMB exchange rate yield causes a change in the yield of stock index futures. Policymakers need to pay close attention to changes in the offshore RMB exchange rate in order to better grasp market trends and manage risks accordingly.

Diverging Macroeconomic Expectations and Business Cycles

Diverging Macroeconomic Expectations and Business Cycles

Consumers' macroeconomic expectations

AbstractAfter the financial crisis of 2008, central banks around the world have increased their communication efforts to reach consumers, with the aim of both guiding and anchoring their inflation expectations. For the expectations channel of monetary policy to work as intended, central banks need a thorough understanding of the formation process of expectations by the general public and of the relationship between expectations and economic choices. This warrants reliable and detailed data on consumers' expectations of macroeconomic variables such as inflation or interest rates. We, thus, survey the available survey data and issues regarding the measurement of macroeconomic expectations. Furthermore, we discuss the research frontier on important aspects of the expectations channel: We evaluate the evidence on whether expectations are formed consistently with standard macroeconomic relationships, discuss the insights with respect to the anchoring of inflation expectations, explore the role of narratives and preferences and lastly, we survey the research on causal effects of central bank communication on expectations and economic choices.

Covid-19 outbreak, ambiguity aversion, and macroeconomic expectations

Covid-19 outbreak, ambiguity aversion, and macroeconomic expectations

Consumption and income expectations during Covid-19

Using a survey of Italian households administered in November 2021, we study the effect of microeconomic and macroeconomic expectations about the health crisis and income growth on consumption expectations in 2022. The survey elicits individual-level indicators of income and consumption expectations, distinguishing between consumption at home, away from home, online and total. We find that expected household income and expected GDP growth are strongly related to consumption expectations; income risk is positively associated with expected consumption growth for richer households. Finally, our results indicate that health-related variables were not a major drivers of consumption expectations in 2022.

The role of stickiness, extrapolation and past consensus forecasts in macroeconomic expectations

We estimate a simple reduced-form model of expectation formation with three distinct deviations from full-information rational expectations that combines underreaction with overreaction to new information. In particular, forecasts are sticky, extrapolate the most recent news about the current period, and depend on the lagged consensus forecast about the period being forecast. We find that all three biases are present in the Survey of Professional Forecasters as well as in the Livingston Survey, and that their magnitudes depend on the forecasting horizon. We also stress the point that using the past consensus forecast to form expectations is a reasonable thing to do if a forecaster is not able to come up with full-information rational expectations all by herself. Finally, we show that forecasters that have more sticky expectations generally tend to rely less on the lagged consensus forecast but extrapolate news about the current period more.

Eliciting expectation uncertainty from private households

Recently, much attention has been devoted to measuring macroeconomic (expectation) uncertainty and its impact on aggregate economic fluctuations. This paper presents a new qualitative measure of macroeconomic expectation uncertainty based on data from a German online survey of consumer expectations. The survey design works well. Elicited expectation uncertainty is related to data volatility and conventional measures of uncertainty as expected. Its dependency on socioeconomic factors is in line with previous evidence based on quantitative uncertainty measures. The new measure offers a very efficient way of eliciting expectation uncertainty and can be used to obtain uncertainty measures on many different expectations at a low cost.

Intrahousehold Disagreement about Macroeconomic Expectations

Intrahousehold Disagreement about Macroeconomic Expectations

The Macroeconomic Expectations of U.S. Managers

The Macroeconomic Expectations of U.S. Managers

Value premium and macroeconomic variables

AbstractThis paper investigates the effect of macroeconomic expectations on the value premium. We introduce a two‐pass estimation procedure to extrapolate the impact of investors' macroexpectations on the firm fundamental value of Rhodes‐Kropf, Robinson, and Viswanathan. We find that the level and slope of the term structure affect valuation, revealing a heavily industry‐dependent effect. The portfolios sorted on metrics orthogonal to macroeconomic variables show a clear association between the misvaluation component of value premium and size risk. By removing the influence of the macroeconomic conditions and size, we separate the portion of the value premium that rewards macroeconomic expectations.

Macroeconomic expectations and consumer sentiment during the COVID-19 pandemic: The role of others’ beliefs

This paper investigates the effect of information about cross-country ratings of the government’s and the public’s reaction to the COVID-19 pandemic on consumers’ macroeconomic expectations and sentiment. We conduct consumer surveys with randomized control trials (RCTs) in two waves in Thailand and Vietnam. The information treatments have the strongest effect when the information shown contradicts consumers’ prior beliefs. In the first survey, conducted when the first lockdown was eased, treatment effects are stronger in Vietnam, causing more optimistic expectations and sentiment. In the second survey, conducted at the start of the second wave of infections, treatment effects are stronger in Thailand, causing a more pessimistic outlook.

Overreaction and Diagnostic Expectations in Macroeconomics

We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data.