Expectations and Choice in Macroeconomics: Causal Evidence

Project Outcomes Statement

Overview
This project investigated how households and firms form expectations about key economic variables and how those expectations influence decisions such as spending and saving. Expectations are central to economic behavior: they shape responses to monetary and fiscal policy and determine how shocks propagate through the economy. Yet, economists have long lacked direct evidence on how people form expectations and how policy communication affects those beliefs. Our goal was to fill this gap by combining large-scale surveys, randomized experiments, and administrative data to provide rigorous, causal evidence on expectation formation and its consequences.

Key Outcomes and Findings (Intellectual Merit)
Over the life of the award, we conducted quarterly surveys of U.S. households using the Nielsen Homescan panel and related datasets. These surveys were paired with household-level spending data and included randomized information treatments to identify causal effects. Our research produced several major findings:

- Central bank communication matters - but with limits. We documented how monetary policy statements influence household expectations about inflation and interest rates, and how these beliefs translate into consumption and savings decisions. We also identified the boundaries of forward guidance: while communication can shape expectations, its effectiveness depends on clarity and credibility.

- Uncertainty shocks drive precautionary behavior. We showed that heightened uncertainty leads households to cut spending and increase savings, amplifying economic downturns. This finding helps explain how uncertainty transmits through business cycles.

- Joint expectation formation. Our work revealed that households form expectations about multiple macroeconomic variables simultaneously, not in isolation. This insight improves structural models used by policymakers.

Broader Impacts
The project delivered significant benefits beyond academic research. We trained Ph.D. students and pre-doctoral researchers in cutting-edge empirical methods, preparing them for careers in economics. Several undergraduate research assistants gained exposure to real-world data analysis and pursued graduate studies as a result. Our approach - combining surveys with administrative data - has become a benchmark across social sciences and is now widely adopted in related fields.

Our findings influenced policy discussions at the highest levels. Research outputs were presented at major central banks, including the Federal Reserve, and informed monetary policy communication strategies. During the COVID-19 recession, our survey-based insights on household expectations and spending behavior were cited in policy deliberations and helped shape responses to the crisis. Beyond academia, we disseminated results through NBER working papers, conferences, and public platforms such as VoxEU.org. Media coverage in the Wall Street Journal, Washington Post, and New York Times brought these insights to a broad audience, enhancing public understanding of economic policy.

Impact on Central Banking
One of the most notable outcomes of this project is its direct impact on central banking practice. Our research demonstrated that effective communication can improve policy transmission by aligning household expectations with policy goals. Several of our papers are now taught in Ph.D. programs and referenced in central bank research departments. By clarifying the mechanisms through which expectations shape behavior, this work helps policymakers design strategies that stabilize the economy and support well-being during crises.

Selected Publications

- Perceived and Expected Rates of Inflation of US Firms (AEA Papers and Proceedings, 2023): https://doi.org/10.1257/pandp.20231034

- The Effect of Macroeconomic Uncertainty on Household Spending (AER, 2024): https://doi.org/10.1257/aer.20221167

- Forward Guidance and Household Expectations (JEEA, 2023): https://doi.org/10.1093/jeea/jvad003

- Does Policy Communication during COVID Work? (IJCB, 2022): https://doi.org/10.3386/w27384

- Monetary Policy Communications and Their Effects on Household Inflation Expectations (JPE, 2022): https://doi.org/10.1086/718982

- The Expected, Perceived, and Realized Inflation of US Households Before and During the COVID-19 Pandemic (IMF Economic Review, 2022): https://doi.org/10.1057/s41308-022-00175-7

- Tell Me Something I Don't Already Know: Learning in Low and High Inflation Settings (Econometrica, 2025): https://www.econometricsociety.org/publications/econometrica/2025/01/01/Tell-Me-Something-I-Dont-Already-Know-Learning-in-Low-and-High-Inflation-Settings

Summary
In sum, this project provided new evidence on how expectations influence economic decisions and how policy can shape those expectations. By integrating surveys, experiments, and administrative data, we advanced scientific understanding and delivered practical insights for monetary and fiscal policy. These outcomes reflect the intellectual merit and broader impacts envisioned in the original proposal.