Survey Data in Macroeconomics

I. Introduction

Prof. Dr. Lena Dräger

Johannes Gutenberg-University Mainz, GSEFM field course

Email: [email protected]

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 Organization of the course

Organization of the Course

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 Organization of the course

Contact Details

Recht und Wirtschaft II - Raum 02-1161

Email: [email protected]

Fon: 06131-3920126

Website: http://www.international-macro.economics.uni-mainz.de/

Office hours on demand – just send me an email

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 Organization of the course

Organization of the course

Lectures during the first 3 weeks

Then seminar style: We’ll discuss selected papers on topics using

survey micro data to analyze research questions in monetary macro

Students are expected to study ALL papers in the syllabus beforehand!

Course requirements: Presentation of the outline for the term paper

(25%) and written term paper (75%)

All course materials are uploaded to my website at

www.international-macroeconomics.uni-mainz.de (→ Teaching
→ Summer Term 17)

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 Organization of the course

Organization of the course

Discuss timing to avoid overlap with Prof. von Thadden’s course

Note:
No class on June 13, 2017!

Instead: Extra class on June 20, 2017 from 2pm-3.30pm in room

HoF 1.27/Dubai

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 Organization of the course

Organization of the course

I. Introduction

II. Survey datasets and methodological issues

III. Econometric methods for the analysis of survey microdata

IV. Papers: Sociodemographic differences of households’ inflation

expectations

V. Papers: Empirical evidence of information frictions and learning

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 Organization of the course

Organization of the course

VI. Papers: Disagreement and anchoring of inflation expectations

VII. Papers: Firms’ expectations and business choices

VIII. Papers: Households’ understanding of monetary policy and the role of

central bank communication and news

IX. Papers: Households’ macro expectations and their consumption/saving

plans

X. Presentations of outlines for the term paper (last two weeks)

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 Organization of the course

Term Paper

Should be based on (one of) the core research papers given in the
syllabus (or an equally well-suited paper)

Should make use of a survey micro data set to either replicate part of
the analysis in the core paper or to conduct an own research idea
related to the topic of this course

You should think about using this course as a stepping stone for your
own research ideas within the PhD!

Have a look at the topics and papers in the syllabus and let me know
by 16th May, 2017, which topic you choose for your term paper

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 Organization of the course

Outline Today

1 The role of macroeconomic expectations in monetary macro

2 What is survey data? Why is survey microdata interesting for

macroeconomists? Which macro questions can only be tested
empirically with microdata?

3 Presentation of the topics of this course

4 Existing fields of economics using survey data that we don’t cover here

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 The Role of Macroeconomic Expectations

The Role of Macroeconomic Expectations

in Monetary Macro

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 The Role of Macroeconomic Expectations

The Role of Macroeconomic Expectations

All topics discussed in this course evaluate an aspect of

macroeconomic expectations, mainly inflation expectations

Why are inflation expectations important for individual economic

decisions?

Why do central banks care about inflation expectations?

Which economic agents’ expectations matter for which variable?

How does the interaction among agents’ expectations influence macro

outcomes and policy making?

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 The Role of Macroeconomic Expectations

The Role of Macroeconomic Expectations

Macroeconomic expectations are crucial for many economic decisions:

Inflation expectations:
Influence price and wage setting decisions and, therefore, current
inflation
Form part of real interest rates which influence investment and
consumption decisions

Business cycle expectations such as unemployment expectations or

output (gap) expectations influence current and planned investment
and consumption paths

Interest rate expectations along the yield curve are important for
financial investment decisions and any decision involving credit/debt

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 The Role of Macroeconomic Expectations

Rational Expectations

60s/70s rational expectations “revolution” in macro theory1

Reduces the expectation formation to a mathematical problem that

can be solved within the stochastic model: pte = Et (pt+1 |It (z))

No need to test/analyze expectations empirically

Instead: Instrument with past actual data using GMM moments

conditions or use data derived from financial market yields

But: Both approaches have to make strong assumptions about the

formation of expectations!

1
See Muth (1961), Lucas (1972, 1973, 1976) and Sargent (1973).
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 The Role of Macroeconomic Expectations

What if expectations are not rational?

Rationality tests use survey data expectations and test for:

Accuracy: Mean absolute forecast errors (MAE) or root mean squared
forecast errors (RMSE) should be close to zero

e
Unbiasedness: Estimate πt = α + βπt−12 + εt and test for
H0 : (α, β) = (0, 1)

Efficiency: Check whether expectations incorporate all relevant

information by regressing expectations errors on a set of lagged
determinants and testing whether these are significant

⇒ Survey expectations frequently fail all or some rationality conditions

(see Thomas (1999) for a survey)!

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 The Role of Macroeconomic Expectations

Alternative Models of Expectation Formation

Sticky information:2 pt = λ ∞ j ∗
P
j=0 (1 − λ) Et−1 pt where λ is the
constant probability of obtaining the full information set

∗

Rational inattention:3 pi = 1 − 2−2κ Θ (x + εi ) where κ∗ is the
optimal amount of attention (given a marginal cost µ), si = x + εi is
a noisy signal and the optimal price is pi∗ = Θx

Heterogeneous expectations/bounded rationality:4 pt+1 e

= Hj P t ,
where P t = (pt , pt−1 , pt−2 , ...) and there are j predictors Hj

2
See Mankiw and Reis (2002).
3
See Sims (2003).
4
See Brock and Hommes (1997).
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 The Role of Macroeconomic Expectations

Macroeconomic Expectations and Monetary Policy

Actual inflation is a function of inflation expectations, if people are

forward-looking (at least to some degree)

Easier to target inflation if expectations are less dispersed ⇒

disagreement

If (medium- to long-run) inflation expectations are anchored,

monetary policy can stabilize the economy in the short-run without
risking (medium-run) price stability ⇒ importance of central bank
credibility and communication!

Inflation expectations determine real interest rates: rt = it − πte ⇒ at

the ZLB the central bank could lower the real interest rate by raising
inflation expectations!
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 The Use of Survey Data

The Use of Survey Data

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 The Use of Survey Data

Survey Data of Macroeconomic Expectations

If expectations are not rational, we can just ask people!

Qualitative expectations, Example from the Michigan Survey of

Consumers:
Q A12 During the next 12 months, do you think prices in general will go up,
or go down, or stay where they are now?
1. Go up
2. Stay the same
3. Go down

Quantitative expectations, Example from the Michigan Survey of

Consumers:
Q A12b By about what percent do you expect price to go up/down on the
average, during the next 12 months?
X percent
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 The Use of Survey Data

Survey Data of Macroeconomic Expectations

More advanced surveys of expectations include:

Quantitative bins where participants assign probabilities, e.g. inflation

between [-1,0% ]; [0,1% ]; [1,2% ] etc.
⇒ Gives individual probability distributions of expectations
⇒ Measure of individual forecast uncertainty
⇒ Better estimate of mean forecast

More detailed qualitative categories

Different wordings regarding changes in prices/inflation rate

Panel dimension?!

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 The Use of Survey Data

Survey Data Topics in this Course

Topics in this course focus on questions relevant for (monetary)

macroeconomics

The literature surveyed analyzes subjective survey data:

Macroeconomic expectations, mainly inflation expectations
Subjective reasons, e.g. for investment
Subjective news observed by the survey participant

Objective survey data is used as control variables:

Socio-demographic data such as gender, education, income, age
Family background
Wealth
Employment
etc.

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 The Use of Survey Data

Relevant Surveys

Existing Surveys record the macroeconomic expectations of

professional forecasters, households and firms (to a lesser extent)

Data is often qualitative

Also surveyed: Socio-demographic background including wealth

information, news, current and planned
consumption/saving/investment, literacy...

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 The Use of Survey Data

Relevant Surveys

Professional forecasters: SPF US (Philadelphia Fed), SPF Eurozone (ECB),

Consensus Economics & Blue Chip (not fully publicly available)

Households: University of Michigan Survey of Consumers (US), Survey of

Consumer Expectations (US at New York Fed, relatively new), Joint
Harmonised EU Programme of Business and Consumer Surveys (most EU
countries, microdata not always available), British Household Panel,
Household Finance and Consumption Network (ECB, German Survey is
“Panel of Household Finances” (PHF) at the Bundesbank, relatively new)

Firms: There are some, but they are generally harder to get access to. For
instance: ifo Survey (Germany), survey of New Zealand Firms by Coibion,
Gorodnichenko & Kumar, Duke University Survey of Chief Financial Officers
(CFO), Industrial Trends Survey by the Confederation of British Industry
(UK), Survey on Inflation and Growth Expectations (Banca d’Italia)

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 The Use of Survey Data

Why is Survey Microdata Interesting for Macroeconomists?

Microdata can be used to analyze several important macroeconomic issues

not visible in aggregate survey data:

1 Heterogeneity:
How do macroeconomic expectations differ across socio-demographic
groups? Are they anchored in the same way?
Do different socio-demographic groups face different individual inflation
rates?
Does central bank communication and macroeconomic news reach all
consumers in the same way?
What about (macro)economic and financial literacy?

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 The Use of Survey Data

Why is Survey Microdata Interesting for Macroeconomists?

2 Disagreement:
How does the dispersion of expectations within the cross-section
(disagreement) vary over the business cycle?
How is disagreement linked to forecast accuracy?
Is disagreement regarding the expectations on several macroeconomic
variables linked as we might expect from economic theory?
Can monetary policy influence the degree of disagreement?

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 The Use of Survey Data

Why is Survey Microdata Interesting for Macroeconomists?

3 Expectation formation:
Which micro-founded model of expectation formation fits individual
expectations best? This needs a panel dimension so we can observe
individual changes in expectations over time
Is there evidence of imperfect information and, if so, which type?
Are expectations anchored and how does the degree of anchoring
evolve over time?

4 Do agents act on their expectations?

How are macroeconomic expectations linked to agents’ economic
decisions at the individual level ? We can use these links to test
economic theory like the Euler equation
Do consumers consider their inflation and business cycle expectations
when they take decisions about current and future consumption and
saving?
Do firm decision makers consider their inflation expectations when they
set prices and when they take decisions about investment?
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 Topics of this Course

Topics of this Course

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 Topics of this Course

Topics of this Course

1 Inflation expectations of households across demographic groups
Jonung (1981); Souleles (2004); Ehrmann et al. (2015)

2 Macroeconomic expectation formation – Evidence of information

frictions
Coibion and Gorodnichenko (2012, 2015a); Andrade and Le Bihan
(2013); Andrade et al. (2016)

3 Macroeconomic expectation formation – Evidence of learning

Malmendier and Nagel (2011, 2016)

4 Disagreement and the anchoring of inflation expectations

Dovern et al. (2012); Easaw et al. (2013); Kumar et al. (2015)

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 Topics of this Course

Topics of this Course

5 Firms’ macroeconomic expectations and their business choices

Bachmann et al. (2013); Coibion et al. (2015)

6 Households’ understanding of monetary policy and the importance of

central bank communication and news
Carvalho and Nechio (2014); Coibion and Gorodnichenko (2015b);
Dräger et al. (2016)

7 Households’ consumption plans and the role of their macroeconomic

expectations
Bachmann et al. (2015); Ichiue and Nishiguchi (2015); D’Acunto et al.
(2016); Crump et al. (2015); Dräger (2016)

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 Other Fields of Economics Using Survey Data

Other Fields of Economics Using Survey

Data not Covered Here

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 Other Fields of Economics Using Survey Data

Other Fields of Economics Using Survey Data

Labour economics:
Labour market flows
Wage dynamics
Family economics

Firm decisions:
Micro price data
Subjective business climate (e.g. ifo index)

Household decisions:
Portfolio choices
Income, wealth and consumption inequality
Consumption choices
Life-cycle economics

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 Other Fields of Economics Using Survey Data

Other Fields of Economics Using Survey Data

Banking:
Subjective lending conditions
Banks’ balance sheet
Housing market flows

Etc.!!

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 Other Fields of Economics Using Survey Data

Literature I

Andrade, P., R. K. Crump, S. Eusepi, and E. Moench (2016).

Fundamental disagreement.
Journal of Monetary Economics 83, 106–128.

Andrade, P. and H. Le Bihan (2013).

Inattentive professional forecasters.
Journal of Monetary Economics 60 (8), 967–982.

Bachmann, R., T. O. Berg, and E. R. Sims (2015).

Inflation expectations and readiness to spend: Cross-sectional evidence.
American Economic Journal: Economic Policy 7 (1), 1–35.

Bachmann, R., S. Elstner, and E. R. Sims (2013).

Uncertainty and Economics Activity: Evidence from Business Survey Data.
American Economic Journal: Macroeconomics 5 (2), 217–249.

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 Other Fields of Economics Using Survey Data

Literature II
Brock, W. A. and C. H. Hommes (1997).
A rational route to randomness.
Econometrica 65 (5), 1059–1095.

Carvalho, C. and F. Nechio (2014).

Do People Understand Monetary Policy?
Journal of Monetary Economics 66, 108–123.

Coibion, O. and Y. Gorodnichenko (2012).

What Can Survey Forecasts Tell Us About Information Rigidities?
Journal of Political Economy 120 (1), 116–159.

Coibion, O. and Y. Gorodnichenko (2015a).

Information rigidity and the expectation formation process: A simple
framework and new facts.
American Economic Review 105 (8), 2644–78.
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 Other Fields of Economics Using Survey Data

Literature III

Coibion, O. and Y. Gorodnichenko (2015b).

Is the Phillips Curve Alive and Well After All? Inflation Expectations and the
Missing Disinflation.
AEJ: Macroeconomics 7 (1), 197–232.

Coibion, O., Y. Gorodnichenko, and S. Kumar (2015).

How Do Firms Form Their Expectations? New Survey Evidence.
NBER Working Paper 21092.

Crump, R. K., S. Eusepi, A. Tambalotti, and G. Topa (2015).

Subjective Intertemporal Substitution.
Federal Reserve Bank of New York Staff Reports 734.

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 Other Fields of Economics Using Survey Data

Literature IV

D’Acunto, F., D. Hoang, and M. Weber (2016).

Unconventional Fiscal Policy, Inflation Expectations, and Consumption
Expenditure.
Technical Report 5793, CESifo Working Paper.

Dovern, J., U. Fritsche, and J. Slacalek (2012).

Disagreement Among Forecasters in G7 Countries.
The Review of Economics and Statistics 94 (4), 1081–1096.

Dräger, L. (2016).
Are Consumers Planning Consumption According to an Euler Equation?
CESifo Working Paper 6249.

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 Other Fields of Economics Using Survey Data

Literature V

Dräger, L., M. J. Lamla, and D. Pfajfar (2016).

Are Survey Expectations Theory-Consistent? The Role of Central Bank
Communication and News.
European Economic Review 85 (C), 84–111.

Easaw, J., R. Golinelli, and M. Malgarini (2013).

What determines households inflation expectations? theory and evidence
from a household survey.
European Economic Review 61, 1–13.

Ehrmann, M., D. Pfajfar, and E. Santoro (2015).

Consumers attitudes’ and their inflation expectations.
Finance and Economics Discussion Series 2015-015, Federal Reserve Board.

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 Other Fields of Economics Using Survey Data

Literature VI

Ichiue, H. and S. Nishiguchi (2015).

Inflation Expectations and Consumer Spending at the Zero Bound: Micro
Evidence.
Economic Inquiry 53 (2), 1086–1107.

Jonung, L. (1981).
Perceived and Expected Rates of Inflation in Sweden.
American Economic Review 71 (5), 961–968.

Kumar, S., H. Afrouzi, O. Coibion, and Y. Gorodnichenko (2015).

Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from
Firms in New Zealand.
Brookings Papers on Economic Activity Fall, 151–219.

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 Other Fields of Economics Using Survey Data

Literature VII

Lucas, R. E. (1972).
Expectations and the Neutrality of Money.
Journal of Economic Theory 4 (2), 103–124.

Lucas, R. E. (1973).
Some International Evidence on Output-Inflation Tradeoffs.
American Economic Review 63 (3), 326–334.

Lucas, R. E. (1976).
Econometric Policy Evaluation: A Critique.
Carnegie-Rochester Conference Series on Public Policy 1 (1), 19–46.

Malmendier, U. and S. Nagel (2011).

Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?
The Quarterly Journal of Economics 126, 373–416.

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 Other Fields of Economics Using Survey Data

Literature VIII

Malmendier, U. and S. Nagel (2016).

Learning from inflation experiences.
The Quarterly Journal of Economics 131 (1), 53–87.

Mankiw, N. G. and R. Reis (2002).

Sticky Information versus Sticky Prices: A Proposal to Replace the New
Keynesian Phillips Curve.
Quarterly Journal of Economics 117 (4), 1295–1328.

Muth, J. F. (1961).
Rational Expectations and the Theory of Price Movements.
Econometrica 29 (3), 315–335.

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 Other Fields of Economics Using Survey Data

Literature IX

Sargent, T. J. (1973).
Rational expectations, the real rate of interest, and the natural rate of
unemployment.
Brookings Papers on Economic Activity 4 (2), 429–480.

Sims, C. A. (2003).
Implications of Rational Inattention.
Journal of Monetary Economics 50 (3), 665–690.

Souleles, N. S. (2004).
Expectations, Heterogenous Forecast Errors, and Consumption: Micro
Evidence from the Michigan Consumer Sentiment Surveys.
Journal of Money, Credit, and Banking 36 (1), 40–72.

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 Other Fields of Economics Using Survey Data

Literature X

Thomas, L. (1999).
Survey Measures of Expected U.S. Inflation.
Journal of Economic Perspectives 13 (4), 125–144.

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