We Think That They Think: Political Affiliation and Higher-Order Beliefs

Surveys consistently show large heterogeneity of macroeconomic beliefs across consumers, and yet very little is known about consumers' higher-order beliefs. In this paper, we conduct a series of novel surveys eliciting inflation forecasts from U.S. consumers. Crucially, we ask respondents to report their higher-order beliefs of consumers across the political spectrum. In this context, we document new facts regarding the role of partisanship in both own- and higher-order beliefs. We find that higher-order beliefs differ substantially from own beliefs. Qualitatively, consumers correctly understand the "partisan gap" in inflation forecasts: consumers affiliated with the current president have lower inflation expectations. However, the "perceived" (higher-order) partisan gap is larger than the actual partisan gap in inflation forecasts. These patterns are true both unconditionally as well as under simple conditional (hypothetical) political scenarios. Information treatments from partisan news sources are successful at moving inflation expectations in the intended direction. Our results show that political identity is an important driver of own and higher-order beliefs.