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(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 …