Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 07 May 2022

Inflation has surged to historic levels around the globe. Designing the correct policy responses requires a deep understanding of how consumers form and update their inflation expectations, and how expectations influence economic behaviour. This column summarises key findings in the literature on inflation expectations, particularly how they deviate from the full-information rational expectations paradigm. Household inflation expectations are typically biased upwards, systematically skewed, and correlated with social/demographic characteristics. Studying these heterogeneities and their impact on aggregate outcomes is a key challenge for policymakers going forward. 

Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 15 November 2019

Policymakers seek to manage inflation expectations, but we understand little about how households form and update their expectations of inflation. The column tests Lucas's conjecture that the price changes households observe, rather than all price changes, drive expectations. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations. This challenges the modelling assumptions that central bank policymakers currently make.

Alex Cukierman, 06 September 2019

Individuals are never fully certain whether economic developments are persistent or temporary. This column shows that this permanent-transitory confusion has pervasive implications. It argues that the confusion injects the past into even purely forward-looking New-Keynesian frameworks, and shows empirically that inflationary forecasts indeed rely on past inflation.

Alex Cukierman, Thomas Lustenberger, 04 November 2018

Almost 60 years ago, John Muth introduced the idea that adaptive expectations are rational if they efficiently use all available information. However, individuals are never fully certain, even ex post, about the permanence of economic developments. Using Israeli data, this explores the implications of this residual uncertainty for market efficiency. The findings point to issues with conventional market efficiency tests where ‘permanent-transitory confusion’ is in effect. 

Akvile Bertasiute, Domenico Massaro, Matthias Weber, 07 July 2018

A key critique of commonly used macroeconomic models is their reliance on the assumption of rational expectations. This column addresses this concern with a model of currency unions wherein expectations are formed through behavioural reinforcement learning, that is, learning from past mistakes. The model suggests that economic integration is of crucial importance to the functioning of a currency union. Monetary policy, in contrast, can only play a limited stabilising role.

John Muellbauer, 21 December 2016

The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.

Wouter den Haan, 23 December 2014

Macroecomics has changed in a number of ways since the global crisis. For example, there is now more emphasis on modeling the financial sector, self-fulfilling panics, herd behaviour and the new role of demand. This Vox Talk discusses these changes as well as those areas in macroeconomics that are currently perhaps not researched enough. Wouter den Haan explains the inadequacy of the conventional 'rational expectations' approach, quantitative easing, endogenous risk and deleveraging and refers to current CEPR research that reflects the changes. He concludes by reminding us that the 'baby boomers' issue could be the basis of the next crisis.

Jonas Dovern, Ulrich Fritsche, Prakash Loungani, Natalia Tamirisa, 13 November 2014

Forecasts of many macroeconomic variables tend to be serially correlated, which is inconsistent with rational expectations. This column presents new evidence from a two-decade panel of individual forecasts from 36 different nations. While there is evidence of sluggish behaviour in average forecasts, individual forecasts are revised quite often. Sticky information theory might not be an adequate description of the expectations formation of forecasters. 

Olivier Blanchard, 03 October 2014

Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.

Volker Wieland, Christos Koulovatianos, 01 November 2011

A stock-market collapse such as the one after the 2008 Lehman Brothers default is followed by more pessimistic assessments of the likelihood of future collapses in surveys and by lower price-dividend ratios. This column argues this reaction of expectations and asset prices can be explained by Bayesian decision theory. The key is to appreciate that market participants know little about the drivers of such crashes. They revise their beliefs and learn over time.

Ramon Marimon, 16 October 2011

The 2011 Nobel Prize in Economic Sciences has been awarded to Thomas Sargent and Christopher Sims. This column summarises the importance of their contributions to macroeconomic analysis and policymaking.

Roger Farmer, 18 August 2011

One explanation for the 2007-09 global crisis is that consumers, markets, and politicians were gripped by “irrational exuberance” that led them to believe the record-high house prices and stock prices were sustainable. This column proposes a new explanation based on rational behaviour and microeconomic theory. It argues that however high stock prices rise, there is always an equilibrium in which they can rise further.

Richard Baldwin, 04 February 2011

The financial crisis and the ensuing recession have prompted reappraisals of macroeconomic theory. This column introduces Policy Insight No 53 authored by Axel Leijonhuvd that argues that it is time to stop thinking of the macroeconomy as an electrical circuit; we must think of an economy as an “open system” and adapt our methods to the nature of the economy.

Axel Leijonhufvud, 04 February 2011

The financial crisis and the ensuing recession have prompted reappraisals of the state of macroeconomic theory. CEPR Policy Insight No 53 argues that we have to think of an economy as an “open system” in the ontological sense and adapt out methods to the nature of an economy – to change how we do economics.


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