The Psychology of Macroeconomic Expectations

We present a model of “animal spirits” in which context and emotions affect macroeconomic beliefs by shaping which experiences people recall to simulate similar future aggregate states. We test this mechanism by priming Dutch National Bank Survey respondents to recall personal financial or health adversities before eliciting inflation and home price expectations. The treatment causes instability in beliefs and reasoning tied to the measured similarity of the primed experiences to different macro states. This similarity structure also accounts for heterogeneity in beliefs and reasoning based on a range of other personal experiences we measure. The model micro founds several features of macroeconomic beliefs, including narratives, and yields a “confidence multiplier”: spending by some agents cues optimistic context for others, raising their spending.