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Growth Forecast Revisions Over Business Cycles: Evidence From The Survey Of Professional Forecasters, Sungjun Huh, Insu Kim

Economics Faculty Research and Publications

This paper studies how expectations regarding current and future output growth are revised as the state of the economy evolves. We study this issue using GDP growth forecasts from the Survey of Professional Forecasters. We find an asymmetric relationship between forecast revisions and GDP growth. Forecasters make larger forecast revisions during contractions than during expansions when the deviation of the economy from its normal state is controlled for.

(Wp 2020-05) Change And Continuity In Economic Methodology And Philosophy Of Economics, John B. Davis

Economics Working Papers

This paper provides my reflections on the state of economic methodology and philosophy of economics as of the beginning of 2020 following the end a fifteen year co-editorship of the Journal of Economic Methodology with Wade Hands. It looks at how economic methodology and philosophy of economics, as a meta-field type of research, has changed since it emerged as a distinct subfield in economics in the 1980s. Using an evolution of technology analysis, it distinguishes two different possible scenarios for the field’s future according to environmental factors operating upon it and how specialization in research may affect both it and …

Experiential Learning In The Jesuit Business School Context: The Agbl Program, Nicholas J C Santos, Heather Kohls, Jennifer S. Maney

Economics Faculty Research and Publications

In an attempt to engage Jesuit business school students in transformational learning, Marquette University offers the Applied Global Business Learning (AGBL) Program. This program embodies the Ignatian pedagogy paradigm of helping students gain an understanding of a business need in a different part of the world, engages them in action, and has them reflect on and evaluate the experience as it relates to how they take the experience to change the world. This paper discusses the program’s relation to the Jesuit tradition, the history of the program including where students go and what they do, the impact on student learning, …

The Influence Of Learning And Price-Level Targeting On Central Bank Forward Guidance, Stephen J. Cole

Economics Faculty Research and Publications

This paper examines how the effectiveness of central bank forward guidance depends on two key channels: the expectations formation process and the monetary policy regime. The results show that rational expectations relative to an adaptive learning rule amplifies the positive benefits a price-level targeting central bank creates for forward guidance. Specifically, forward guidance generates greater amounts of output and inflation under a price-level than inflation targeting monetary policy regime, but rational expectations overstates these positive benefits compared to adaptive learning. The different responses of expectations between rational expectations and adaptive learning to forward guidance are driving this performance gap. Thus, …

The Limits Of Central Bank Forward Guidance Under Learning, Stephen J. Cole

Economics Faculty Research and Publications

This paper investigates the effectiveness of central bank forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. During a period of economic crisis, output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared with a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance.

Competitive Blind Spots And The Cyclicality Of Investment: Experimental Evidence, Cortney S. Rodent, Andrew Smyth

Economics Faculty Research and Publications

We report laboratory experiments investigating the cyclicality of profit‐enhancing investment in a competitive environment. In our setting, optimal investment is counter‐cyclical when investment costs fall following market downturns. However, we do not observe counter‐cyclical investment. Instead, we see much less strategic behavior than our rational investment model anticipates. Our participants exhibit what Porter (1980) terms a competitive blind spot, and heuristic investment models where individuals invest a fixed percentage of their liquidity, or a fixed percentage of anticipated market demand, better fit our data than does optimal investment. We also report a control treatment without cost changes and a treatment …

(Wp 2020-03) The Effect Of Central Bank Credibility On Forward Guidance In An Estimated New Keynesian Model, Stephen J. Cole, Enrique Martínez-García

Economics Working Papers

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 for- ward 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 effects are attenuated and, accordingly, output and inflation do not respond as favorably to …

(Wp 2020-04) Heterogeneity In Individual Expectations, Sentiment, And Constant-Gain Learning, Stephen J. Cole, Fabio Milani

Economics Working Papers

The adaptive learning approach has been fruitfully employed to model the formation of aggregate expectations at the macroeconomic level, as an alternative to rational expectations. This paper uses adaptive learning to understand, instead, the formation of expectations at the micro-level, by focusing on individual expectations and, in particular, trying to account for their heterogeneity.

We exploit survey data on output and inflation expectations by individual professional forecasters. We link micro and macro by endowing forecasters with the same information set that they would have as economic agents in a benchmark New Keynesian model. Forecasters are, however, allowed to differ in …

International Trade Policy Preferences: Evidence Of The Interaction Of Socio-Tropic Influences And Uncertainty Shocks, Joseph Daniels, Emily Kapszukiewicz, Marc Von Der Ruhr

Economics Faculty Research and Publications

This paper provides new evidence supporting the hypothesis that patriotism and nationalism influence personal trade policy preferences in addition to the typical economic determinants. It also examines the interaction of the 9/11 terrorist attacks along with patriotism and nationalism on policy preferences. Using the Heckscher-Ohlin model as a theoretical framework, ordered probit estimations were applied to survey responses from an International Social Survey Program survey question about preferences towards limiting imports. Extensions of the model were sequentially estimated to investigate the impact of national identity on policy preferences. The model was augmented to test how feelings of nationalism and patriotism …

(Wp 2020-02) Belief Reversals As Phase Transitions And Economic Fragility: A Complexity Theory Of Financial Cycles With Reflexive Agents, John B. Davis

Economics Working Papers

This paper aims to contribute to the analysis of expectations and belief reversals in an evolutionary and complexity economics framework. It formulates its analysis in terms of the concept of reflexivity, drawing on the ideas regarding reflexivity in financial markets of George Soros, and lays out a model of how a financial cycle expresses a systematic pattern of interacting feedback effects. The paper develops this analysis as a complex interaction between sets of heterogeneous expectations derived from the behavior of reflexive economic agents. Positive and negative feedback phases in a cycle are distinguished and associated with boom and bust stages …

(Wp 2020-01) The Sea Battle Tomorrow: The Identity Of Reflexive Economic Agents, John B. Davis

Economics Working Papers

This paper develops a conception of reflexive economic agents as an alternative to the standard utility conception, and explains individual identity in terms of how agents adjust to change in a self-organizing way, an idea developed from Herbert Simon. The paper distinguishes closed equilibrium and open process conceptions of the economy, and argues the former fails to explain time in a before-and-after sense in connection with Aristotle’s sea battle problem. A causal model is developed to represent the process conception, and a structure-agency understanding of the adjustment behavior of reflexive economic agents is illustrated using Merton’s self-fulfilling prophecy analysis. Simon’s …