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Shocks and the Expectations Formation Process. A Tale of Two Expectations

  • Maurizio Bovi

To learn the people's expectations formation process, we examine shocks and survey expectations on individual and aggregate income. Data show that shocks have permanent effects on both expectations, which do not diverge systematically because agents revise forecasts. Actually, only expectations on GDP dynamics are revised. These latter overreact to shocks and are more volatile than expectations on personal stances. Disagreement is persistently high. Astonishingly, there is even less consensus when expectations deal with the same fundamental. Lastly, we elaborate a test on whether - and find evidence that - cross sectional disagreement and time series volatility in expectations are equal.

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Paper provided by The Field Experiments Website in its series Natural Field Experiments with number 00390.

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Date of creation: 2014
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Handle: RePEc:feb:natura:00390
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