Expectations as a source of macroeconomic persistence: Evidence from survey expectations in a dynamic macro model

Embedding survey expectations in a standard DSGE model helps to identify key slope parameters in standard relationships; dramatically reduces the need for lagged dependent variables, often motivated by price-indexation and habit formation; and obviates the need for autocorrelated structural shocks i...

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Bibliographic Details
Published in:Journal of monetary economics 2017-04, Vol.86, p.22-35
Main Author: Fuhrer, Jeff
Format: Article
Language:English
Subjects:
DSGE models
Habit formation
Indexation
Persistence
Rational expectations
Survey expectations
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Summary:Embedding survey expectations in a standard DSGE model helps to identify key slope parameters in standard relationships; dramatically reduces the need for lagged dependent variables, often motivated by price-indexation and habit formation; and obviates the need for autocorrelated structural shocks in the key equations. Formal statistical tests demonstrate that much of the persistence in aggregate data is better accounted for by slow-moving expectations, rather than by habits, indexation and autocorrelated structural shocks. •Embeds survey expectations in a canonical DSGE model.•Develops a method for endogenizing survey expectations in this model.•Improves identification of key parameters in standard relationships.•Reduces the need for lagged dependent variables and correlated structural shocks.•Persistence in data is better accounted for by slow-moving expectations.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2016.12.003