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Fundamental disagreement
Moench, Emanuel; Eusepi, Stefano; Andrade, Philippe; Crump, Richard K. (2013-12-01)
We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two ...
Staff Reports , Paper 655

Report
Determinants of college major choice: identification using an information experiment
Zafar, Basit; Wiswall, Matthew (2011)
This paper studies the determinants of college major choice using an experimentally generated panel of beliefs, obtained by providing students with information on the true population distribution of various major-specific characteristics. Students logically revise their beliefs in response to the information, and their subjective beliefs about future major choice are associated with beliefs about their own earnings and ability. We estimate a rich model of college major choice using the panel of beliefs data. While expected earnings and perceived ability are a significant determinant of major ...
Staff Reports , Paper 500

Report
The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times
Crump, Richard K.; Eusepi, Stefano; Giannoni, Marc; Sahin, Aysegul (2024-03-01)
Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut*, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022-23 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut* and a rise in the unemployment rate. This implies that ...
Staff Reports , Paper 1086

Working Paper
Credit Enforcement Cycles
Drozd, Lukasz A.; Serrano-Padial, Ricardo (2017-08-21)
Empirical evidence suggests that widespread financial distress, by disrupting enforcement of credit contracts, can be self-propagatory and adversely affect the supply of credit. We propose a unifying theory that models the interplay between enforcement, borrower default decisions, and the provision of credit. The central tenets of our framework are the presence of capacity constrained enforcement and borrower heterogeneity. We show that, despite heterogeneity, borrowers tend to coordinate their default choices, leading to fragility and to credit rationing. Our model provides a rationale for ...
Working Papers , Paper 17-27

Working Paper
A Comprehensive Empirical Evaluation of Biases in Expectation Formation
Eva, Kenneth; Winkler, Fabian (2023-06-27)
We revisit predictability of forecast errors in macroeconomic survey data, which is often taken as evidence of behavioral biases at odds with rational expectations. We argue that to reject rational expectations, one must be able to predict forecast errors out of sample. However, the regressions used in the literature often perform poorly out of sample. The models seem unstable and could not have helped to improve forecasts with access only to available information. We do find some notable exceptions to this finding, in particular mean bias in interest rate forecasts, that survive our ...
Finance and Economics Discussion Series , Paper 2023-042

Discussion Paper
Consumers Increasingly Expect Additional Government Support amid COVID-19 Pandemic
Koşar, Gizem; Smith, Kyle; Van der Klaauw, Wilbert (2020-05-26)
The New York Fed’s Center for Microeconomic Data released results today from its April 2020 SCE Public Policy Survey, which provides information on consumers' expectations regarding future changes to a wide range of fiscal and social insurance policies and the potential impact of these changes on their households. These data have been collected every four months since October 2015 as part of our Survey of Consumer Expectations (SCE). Given the ongoing COVID-19 pandemic, households face significant uncertainty about their personal situations and the general economic environment when forming ...
Liberty Street Economics , Paper 20200526b

Discussion Paper
Job Seekers’ Beliefs and the Causes of Long-Term Unemployment
Spinnewijn, Johannes; Mueller, Andreas I.; Topa, Giorgio (2021-01-29)
In addition to its terrible human toll, the COVID-19 pandemic has also caused massive disruption in labor markets. In the United States alone, more than 25 million people lost their jobs during the first wave of the pandemic. While many have returned to work since then, a large number have remained unemployed for a prolonged period of time. The number of long-term unemployed (defined as those jobless for twenty-seven weeks or longer) has surged from 1.1 million to almost 4 million. An important concern is that the long-term unemployed face worse employment prospects, but prior work has ...
Liberty Street Economics , Paper 20210129

Working Paper
Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News
Dräger, Lena; Lamla, Michael; Pfajfar, Damjan (2015-05-04)
In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations ...
Finance and Economics Discussion Series , Paper 2015-35

Report
Workers’ Perceptions of Earnings Growth and Employment Risk
Van der Klaauw, Wilbert; Koşar, Gizem (2023-02-01)
In addition to realized earnings and employment shocks, forward-looking individuals are presumed to condition their consumption and labor supply decisions on their subjective beliefs about future labor market risks. This paper uses rich panel data to document considerable individual heterogeneity in earnings growth expectations and in the perceived likelihood of voluntary and involuntary job exits. We examine how expectations evolve over the working life and business cycle, and how they co-vary with macroeconomic expectations and personal experiences. While largely consistent with patterns in ...
Staff Reports , Paper 1056

Working Paper
Is Inflation Default? The Role of Information in Debt Crises
Bassetto, Marco; Galli, Carlo (2017-03-17)
We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset ("government debt") after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, but ...
Working Paper Series , Paper WP-2017-6

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