Subjective models of the macroeconomy: evidence from experts and representative samples

This article summary is part of my personal background research work. The top part of each post had a detailed summary of the article. Scroll farther down the page for the article's broader implications for Bitcoin.

(1) Article Summary

Link

Subjective Models of the Macroeconomy: Evidence From Experts and Representative Samples

Abstract. We study people’s subjective models of the macroeconomy and shed light on their attentional foundations. To do so, we measure beliefs about the e

OUP Academicpeter.andrebriq-institute.org

Keywords

• Expectation formation
• Subjective models
• Macroeconomic shocks
• Monetary policy
• Fiscal policy
• Associative memory
• Disagreement in beliefs
• Propagation channels
• Expert vs. household perspectives
• Economic forecasting

Short summary

This paper investigates the substantial disagreement in macroeconomic expectations among various economic agents, including experts and households. It explores how subjective models of the macroeconomy shape these expectations, focusing on the belief formation process concerning macroeconomic shocks like oil supply disruptions, monetary policy changes, government spending, and tax adjustments.

By employing vignettes where respondents predict unemployment and inflation under different shock scenarios, the authors highlight significant heterogeneity in forecasts. This heterogeneity is observed both within groups (experts and households) and between them, suggesting that differences in the way individuals recall and process economic mechanisms play a crucial role.

The study finds that experts generally rely on textbook models, which account for broader economic implications, while households often focus on specific, sometimes narrower, mechanisms influenced by personal experiences and associative memory. The paper also delves into how contextual cues and priming can shape these subjective models, altering the forecasts generated by individuals. This work offers new insights into the origins of divergent economic expectations and suggests incorporating associative recall into macroeconomic models as a potential avenue for future research.

Methodology:

The paper uses a vignette-based survey method to measure beliefs about the effects of four common macroeconomic shocks: an oil supply shock, a monetary policy shock, a government spending shock, and a tax shock. The survey was conducted among approximately 6,500 US households and 1,500 experts. Respondents were presented with scenarios where they had to predict future unemployment and inflation under both a baseline scenario and a shock scenario.

To ensure that all respondents had comparable information, the vignettes provided identical details about the source of the shock and historical macroeconomic variables. The differences in forecasts between the baseline and shock scenarios were used to assess the subjective models of the respondents. The study also employed additional surveys and experiments to explore the role of associative memory in shaping these forecasts, including priming interventions to examine how contextual cues influence the economic mechanisms that respondents consider.

Results

1. Heterogeneity in Forecasts: There is substantial heterogeneity in forecasts among both experts and households. This heterogeneity is most pronounced in predictions about inflation in response to monetary policy and tax shocks, and unemployment in response to government spending shocks.
2. Selective Recall of Propagation Channels: Individuals selectively retrieve specific economic mechanisms when making predictions. Experts tend to focus on mechanisms central to standard economic models, while households often neglect these and focus on less conventional mechanisms.
3. Role of Associative Memory: The study shows that associative memory plays a significant role in shaping the heterogeneity of forecasts. Personal experiences and contextual cues can lead individuals to recall specific propagation channels, which in turn influence their economic forecasts.
4. Impact of Priming: The study found that priming individuals with specific contextual cues can alter the propagation channels they consider and, consequently, their forecasts. This suggests that subjective models are not fixed but are formed dynamically based on the context and individual experiences.

Implications

1. Diverse Forecasting Models: The substantial heterogeneity in economic forecasts highlights the need for diverse models that account for different subjective perspectives, particularly when designing economic policies that rely on public expectations.
2. Policy Communication: The role of associative memory in shaping forecasts suggests that how economic policies are communicated to the public can significantly influence expectations. Clear and targeted communication strategies could help align public expectations with policy objectives.
3. Improving Economic Models: Incorporating elements of associative recall and the dynamic nature of subjective models into macroeconomic models could improve the accuracy of economic forecasts and provide better guidance for policy decisions.

Issues

Disagreement Among Experts and Households: The significant divergence in forecasts between experts and households could lead to challenges in achieving broad-based support for economic policies.

Role of Personal Experiences: Personal experiences heavily influence household forecasts, potentially leading to biased or incomplete economic expectations that do not align with broader economic trends.

Context-Dependent Forecasting: The finding that subjective models are formed “on the fly” suggests that economic forecasts can be highly context-dependent, which could complicate efforts to stabilize expectations in the face of economic shocks.

Priming Effects: The ability of priming to alter economic forecasts indicates that public perception of economic policies can be easily influenced, posing risks if such effects are not managed carefully.

Propagation Channels: The focus of households on less conventional propagation channels could lead to over- or underestimations of economic outcomes, impacting consumer behavior and investment decisions.

Cognitive Load in Forecasting: The complexity of macroeconomic forecasting may lead to cognitive overload, particularly among non-experts, reducing the accuracy of public expectations.

Potential Bias in Survey Responses: The use of structured survey questions may lead to ex post rationalization, where respondents justify their forecasts based on the provided options rather than their true beliefs.

Selective Memory Effects: Differences in memory recall between individuals can result in varied forecasts even when the same information is presented, complicating efforts to achieve consensus in economic expectations.

Impact of Communication Strategies: The effectiveness of economic policies may depend significantly on the communication strategies employed, with poorly communicated policies potentially leading to misaligned public expectations.

Challenges in Model Integration: Integrating subjective models and associative recall into traditional macroeconomic models may present methodological challenges, requiring new approaches to economic forecasting.

Open Questions

Disagreement Among Experts and Households

• What factors contribute most significantly to the divergence in forecasts between experts and households?
• How can economic models be adjusted to account for these differences in subjective models?

Role of Personal Experiences

• To what extent do personal experiences bias household economic forecasts away from actual economic trends?
• How can policymakers better understand and mitigate the impact of personal experiences on economic expectations?

Context-Dependent Forecasting

• What are the key contextual factors that shape the formation of subjective models in different economic scenarios?
• How can we develop forecasting tools that remain reliable across varying contexts and individual experiences?

Priming Effects

• What are the most effective strategies for using priming to align public expectations with policy objectives?
• How can we prevent unintended priming effects from leading to misaligned or volatile economic expectations?

Propagation Channels

• How do less conventional propagation channels identified by households influence overall economic outcomes?
• What steps can be taken to ensure that these alternative channels are accurately reflected in economic policy planning?

Cognitive Load in Forecasting

• How does cognitive overload affect the accuracy of economic forecasts among non-experts?
• What can be done to simplify the economic forecasting process for the general public without sacrificing accuracy?

Potential Bias in Survey Responses

• To what extent do structured survey questions lead to ex post rationalization in economic forecasting?
• How can surveys be designed to minimize bias and more accurately capture respondents' true beliefs?

Selective Memory Effects

• How does selective memory influence the recall of economic mechanisms, and what are the implications for economic forecasting?
• What methods can be used to counteract selective memory effects in the formation of economic expectations?

Impact of Communication Strategies

• What communication strategies are most effective in aligning public expectations with economic policy goals?
• How can the effectiveness of these strategies be measured and improved over time?

Challenges in Model Integration

• What are the primary methodological challenges in integrating subjective models and associative recall into traditional macroeconomic models?
• How can interdisciplinary approaches help overcome these challenges and improve economic forecasting?

Five Key Research Needs

1. Understanding Divergence in Forecasts Between Experts and Households: Addressing this question is crucial because it can lead to better integration of diverse economic perspectives into policy-making. Understanding the root causes of divergence can help economists develop models that more accurately reflect the range of beliefs in society, ultimately leading to more effective and broadly supported economic policies.
2. Mitigating the Impact of Personal Experiences on Economic Expectations: This question is important as personal experiences can significantly skew household expectations, leading to decisions that may not align with broader economic realities. By better understanding and mitigating these biases, policymakers can ensure that economic policies are more accurately reflected in public expectations and behaviors.
3. Developing Reliable Forecasting Tools Across Varying Contexts: Economic forecasts need to be robust across different contexts to remain useful in policy-making. This question addresses the need for forecasting tools that can adapt to different individual experiences and contextual factors, ensuring that they remain reliable even in diverse and changing environments.
4. Preventing Unintended Priming Effects in Economic Forecasts: Priming can be a powerful tool for shaping public expectations, but it also carries the risk of creating volatility if not carefully managed. Understanding how to control and prevent unintended priming effects is essential for maintaining stable and predictable economic expectations in the public.
5. Integrating Subjective Models and Associative Recall into Economic Forecasting: The integration of subjective models and associative recall into traditional macroeconomic models represents a significant methodological challenge but also offers the potential for more accurate and nuanced forecasts. This research is critical for developing more sophisticated economic models that reflect the complex reality of human decision-making.

(2) Implications for Bitcoin

The findings from the research on subjective models of the macroeconomy have several potential implications for Bitcoin mining, adoption, and use in our rapidly evolving society.

Divergence in Economic Expectations and Bitcoin Adoption

The substantial heterogeneity in economic expectations observed in the study suggests that individuals may approach Bitcoin adoption with different mental models of economic behavior. For instance, experts and early adopters in the Bitcoin community might view Bitcoin as a hedge against inflation, aligning their expectations with established economic theories that link monetary policy and inflation.

In contrast, the general public, whose expectations are influenced by personal experiences and associative memory, might perceive Bitcoin differently. They may associate it more with speculative investment or as a reaction to mistrust in traditional financial institutions rather than as a direct response to macroeconomic policies. This divergence in perceptions could affect the rate and scale of Bitcoin adoption, with policy communication and public education playing a critical role in shaping these perceptions.

Policy Communication and Regulatory Responses

The finding that economic expectations are dynamically formed based on context and memory recall has important implications for the regulatory landscape surrounding Bitcoin. Governments and regulators often seek to influence public expectations to ensure financial stability. The study suggests that the effectiveness of these efforts will depend significantly on how well policymakers understand and address the subjective models held by different groups.

Misalignment between policy objectives and public perceptions could lead to regulatory pushback or unintended consequences in the Bitcoin market. Therefore, regulators may need to adopt more targeted communication strategies that consider the diverse perspectives and cognitive biases within the Bitcoin community and the general public.

Influence of Macroeconomic Shocks on Bitcoin Use

As the study shows, subjective models can lead to varied responses to macroeconomic shocks. In the context of Bitcoin, this could manifest in differing behaviors during periods of economic turmoil or uncertainty. For instance, while some may flock to Bitcoin as a safe-haven asset during inflationary periods, others may be swayed by negative media coverage or personal bad experiences, leading them to avoid or sell off their holdings. The potential for Bitcoin to serve as a global store of value may thus depend not only on its technical merits but also on how effectively these subjective models are managed through communication and education.

Long-Term Thinking and Bitcoin as a Strategic Asset

The study’s insights into the formation of economic expectations also tie into the broader narrative of Bitcoin as a tool for promoting long-term thinking. As individuals form their economic expectations based on selective recall and associative memory, promoting a deeper understanding of Bitcoin’s potential long-term benefits could align these expectations with the strategic goals of Bitcoin proponents. By fostering an environment where the public is encouraged to consider long-term economic stability and the role of sound money, Bitcoin could be positioned as a key asset in the transition to a more future-oriented economic system.