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Working Paper
Explaining the Boom-Bust Cycle in the U.S. Housing Market: A Reverse-Engineering Approach
Gelain, Paolo; Lansing, Kevin J.; Natvik, Gisele J. (2015-01)
We use a simple quantitative asset pricing model to ?reverse-engineer? the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage ...
Working Paper Series , Paper 2015-2

Working Paper
Earnings Misperceptions and Household Distress
Sanchez, Juan M.; Song, Stefan (2025-11-03)
Households learn whether income changes are temporary or persistent from their own paychecks. This paper develops a quantitative model of financial distress that incorporates this inference and estimates the extent to which households overweight recent outcomes—diagnostic expectations—using survey data on income beliefs. The model explains distress without assuming extreme impatience and aligns with the observed relationship between income and interest rates. Learning and diagnostic expectations account for about half of delinquencies and one-third of bankruptcies. Diagnostic expectations ...
Working Papers , Paper 2025-030

Working Paper
The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model
Martinez-Garcia, Enrique; Cole, Stephen J. (2020-05-27)
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. Hence, anticipation ...
Globalization Institute Working Papers , Paper 375

Working Paper
Indirect Consumer Inflation Expectations: Theory and Evidence
Hajdini, Ina; Knotek, Edward S.; Leer, John; Pedemonte, Mathieu; Rich, Robert W.; Schoenle, Raphael (2022-11-22)
Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations ...
Working Papers , Paper 22-35

Working Paper
Understanding Uncertainty Shocks and the Role of Black Swans
Veldkamp, Laura (2022-12)
Economic uncertainty is a powerful force in the modern economy. Research shows that surges in uncertainty can trigger business cycles, bank runs and asset price fluctuations. But where do sudden surges in uncertainty come from? This paper provides a data-disciplined theory of belief formation that explains large fluctuations in uncertainty. It argues that people do not know the true distribution of macroeconomic outcomes. Like Bayesian econometricians, they estimate a distribution. Our main contribution is to explain why real-time estimation of distributions with non-normal tails results in ...
Finance and Economics Discussion Series , Paper 2022-083

Report
Central bank transparency and nonlinear learning dynamics
Eusepi, Stefano (2008-09-01)
Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy in which agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank transparency about its policy rule. A central bank that does not communicate its rule can induce "learning equilibria" in which the economy alternates between periods of deflation coupled with low output and periods of high economic activity with excessive ...
Staff Reports , Paper 342

Working Paper
The Optimal Monetary Policy Response to Belief Distortions: Model-Free Evidence
Adams, Jonathan; Taipliadis, Symeon (2025-06-23)
Data suggest that monetary policy should ease to offset inflation over-pessimism among households.
Research Working Paper , Paper RWP 25-04

Report
Should Mothers Work? How Perceptions of the Social Norm Affect Individual Attitudes Toward Work in the U.S.
Cortes, Patricia; Koşar, Gizem; Pan, Jessica; Zafar, Basit (2022-11-01)
We study how peer beliefs shape individual attitudes toward maternal labor supply using realistic hypothetical scenarios that elicit recommendations on the labor supply choices of a mother with a young child and an information treatment embedded within representative surveys. Across the scenarios, we find that individuals systematically overestimate the extent of gender conservativeness among the people around them. Exposure to information on peer beliefs leads to a shift in recommendations, driven largely by information-based belief updating. The information treatment also increases ...
Staff Reports , Paper 1038

Working Paper
Revisiting Risky Money
Nesmith, Travis D. (2024-11-26)
Risk was first incorporated into monetary aggregation over thirty-five years ago,using a stochastic version of the workhorse money-in-the-utility-function model.Nevertheless, the mathematical foundations of this stochastic model remain shaky.To firm the foundations, this paper employs a slightly richer probability conceptthan standard Borel-measurability, which enables me to prove the existence of awell-behaved solution and to derive stochastic Euler equations. This measurabilityapproach is long-established albeit less common in economics, possibly because the derivation of stochastic Euler ...
Finance and Economics Discussion Series , Paper 2024-090

Working Paper
Earnings Misperceptions and Household Distress
Sanchez, Juan M.; Song, Stefan (2025-10-24)
Households learn whether income changes are temporary or persistent from the history of their own paychecks. This paper develops a quantitative model of household financial distress that incorporates this inference and uses survey data on income expectations to estimate the extent to which households overweight recent outcomes—diagnostic expectations. The model improves on the standard full-information, rational-expectations benchmark in two key dimensions: it explains financial distress without assuming extreme impatience, and it more accurately captures the empirical correlation between ...
Working Papers , Paper 2025-030

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