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Working Paper
Living Up to Expectations: The Effectiveness of Forward Guidance and Inflation Dynamics Post-Global Financial Crisis
Martínez García, Enrique; Sims, Eric; Cole, Stephen J. (2025-04-03)
This paper studies the effectiveness of forward guidance when central banks face private agents with heterogeneous expectations allowing for a degree of bounded rationality. Exploiting unique survey-based measures of expected inflation, output growth and interest rates, we estimate a small-scale New Keynesian model with forward guidance shocks for the United States and the other G7 countries plus Spain. We find that the share of fully-informed rational expectations (FIRE) agents in aggregate expectations is similar for the U.S., the U.K., Germany and other major advanced economies (albeit far ...
Globalization Institute Working Papers , Paper 424

Working Paper
Financial Contracting with Enforcement Externalities
Drozd, Lukasz A.; Serrano-Padial, Ricardo (2018-10-18)
We study the negative feedback loop between the aggregate default rate and the efficacy of enforcement in a model of debt-financed entrepreneurial activity. The novel feature of our model is that enforcement capacity is accumulated ex ante and thus subject to depletion ex post. We characterize the effect of shocks that deplete enforcement resources on the aggregate default rate and credit supply. In the model default decisions by entrepreneurs are strategic complements, leading to multiple equilibria. We propose a global game selection to overcome equilibrium indeterminacy and show how shocks ...
Working Papers , Paper 18-21

Journal Article
Stability and Equilibrium Selection in Learning Models: A Note of Caution
Chien, YiLi; Cho, In-Koo; Ravikumar, B. (2021-10-18)
Relative to rational expectations models, learning models provide a theory of expectation formation where agents use observed data and a learning rule. Given the possibility of multiple equilibria under rational expectations, the learning literature often uses stability as a criterion to select an equilibrium. This article uses a monetary economy to illustrate that equilibrium selection based on stability is sensitive to specifications of the learning rule. The stability criterion selects qualitatively different equilibria even when the differences in learning specifications are small.
Review , Volume 103 , Issue 4 , Pages 477-488

Working Paper
Inflation and Deflationary Biases in Inflation Expectations
Lamla, Michael J.; Pfajfar, Damjan; Rendell, Lea (2019-06-03)
We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inflation bias as well as a deflationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present (and sizable) in inflation ...
Finance and Economics Discussion Series , Paper 2019-042

Working Paper
Subjective Earnings Risk
Caplin, Andrew; Gregory, Victoria; Lee, Eungik; Leth-Petersen, Soren; Sæverud, Johan (2023-08-11)
While earnings risk is essentially subjective, it is typically inferred from administrative data. We introduce a survey to measure subjective earnings risk, paying particular attention to the expected impacts of job transitions on earnings. Linking with administrative data provides multiple credibility checks. Subjective expectations about earnings growth and job transitions are consistent with actual realizations when appropriately aggregated. We also find subjective earnings risk is lower than risk inferred from administrative data because expected earnings growth is heterogeneous, even ...
Working Papers , Paper 2023-003

Working Paper
Practice Makes Perfect: Learning Effects with Household Point and Density Forecasts of Inflation
Mitchell, James; Shiroff, Taylor; Braitsch, Hana (2024-11-13)
This paper shows how both the characteristics and the accuracy of the point and density forecasts from a well-known panel data survey of households' inflationary expectations – the New York Fed's Survey of Consumer Expectations – depend on the tenure of survey respondents. Households' point and density forecasts of inflation become significantly more accurate with repeated practice of completing the survey. These learning gains are best identified when tenure-based combination forecasts are constructed. Tenured households on average produce lower point forecasts of inflation, perceive ...
Working Papers , Paper 24-25

Working Paper
Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19
Kozlowski, Julian; Veldkamp, Laura; Venkateswaran, Venky (2020-04-14)
The largest economic cost of the COVID-19 pandemic could arise if it changed behavior long after the immediate health crisis is resolved. A common explanation for such a long-lived effect is the scarring of beliefs. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run effect of the COVID crisis depends crucially on whether bankruptcies and changes in habit make existing capital obsolete. A policy that avoided most permanent separation of workers from capital could generate a much larger benefit than ...
Working Papers , Paper 2020-009

Report
University choice: the role of expected earnings, non-pecuniary outcomes, and financial constraints
Zafar, Basit; Delavande, Adeline (2014-08-01)
We investigate the determinants of students? university choice, with a focus on expected monetary returns, non-pecuniary factors enjoyed at school, and financial constraints, in the Pakistani context. To mitigate the identification problem concerning the separation of preferences, expectations, and markets constraints, we combine rich data on individual-specific subjective expectations about labor market and non-pecuniary outcomes, with direct measures of financial constraints and students? stated school choice both with and without financial constraints. Estimates from a life-cycle model ...
Staff Reports , Paper 683

Working Paper
Financial contracting with enforcement externalities
Drozd, Lukasz A.; Serrano-Padial, Ricardo (2016-01-20)
Contract enforceability in financial markets often depends on the aggregate actions of agents. For example, high default rates in credit markets can delay legal enforcement or reduce the value of collateral, incentivizing even more defaults and potentially affecting credit supply. We develop a theory of credit provision in which enforceability of individual contracts is linked to aggregate behavior. The central element behind this link is enforcement capacity, which is endogenously determined by investments in enforcement infrastructure. Our paper sheds new light on the emergence of credit ...
Working Papers , Paper 16-1

Working Paper
Household Beliefs about Fiscal Dominance
Andrade, Philippe; Gautier, Erwan; Mengus, Eric; Moench, Emanuel (2025-03-01)
We study beliefs about fiscal dominance using a survey of German households. We first design and conduct a randomized controlled trial to identify how fiscal news impacts individuals’ debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect a higher debt-to-GDP ratio makes them more likely to revise their inflation expectations upward. These average effects are driven by individuals who think that fiscal resources are stretched. By contrast, individuals ...
Working Papers , Paper 25-2

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