Alexandre Kohlhas

The paper contributes to a research agenda that seeks to find a data-consistent model of expectation formation. Specifically, in this paper, they document that the expectations of households, firms, and professional forecasters in standard surveys simultaneously extrapolate from recent events and underreact to new information on average. They show that existing models of expectation formation, whether behavioral or rational, cannot account for these observations. In place, they develop a rational theory of extrapolation based on limited attention, which is consistent with this evidence. In particular, they show that limited, asymmetric attention to procyclical variables can explain the co-existence of extrapolation and underreactions. They illustrate these mechanisms in a microfounded macroeconomic model, which generates expectations consistent with the survey data, and show that asymmetric attention increases business cycle fluctuations. 

How do you think your paper will influence future research in the area?

Over the past decade there has been an explosion of research that has used survey data on expectations to explore the zoo of different models of expectation formation that exists. Most of this work has documented individual stylized facts and considered individual models that can match them. My hope is that our work will push researchers to consider in more detail how the different stylized facts fit together. In particular, our paper shows that studying only two stylized facts in conjunction alone can severely restrict the set of models of expectation formation that are consistent with the survey data. 

How does it feel now that your paper is accepted?

One word: Relief. 

The paper has been published in American Economic Review 2021, 111(9): 2879–2925 where you can read the paper in its entirety.