Agenda

Nicola Pavoni (Bocconi University) - Macroeconomic expectations and limited awareness (joint work with Debortoli, Iovino, and Zhang)

Abstract: We use data on individual expectations from the Survey of Professional Forecasters and document a series of novel empirical facts. Our evidence rejects the RE hypothesis. We argue that a simple model where agents are unaware of (at least some) supply shocks and partly confounds them with demand shocks can rationalize the empirical evidence. In particular, since agents are subject to an omitted-variable bias when inferring the trade-off between output and inflation, agents perceive a “flatter” Phillips curve—a property that is consistent with our evidence. Finally, we introduce limited aware agents into an otherwise standard New-Keynesian model and show that the presence of such agents increases the output cost of reducing inflation..