Three Essays in Behavioral Macroeconomics

Abstract

Economic agents make decisions and form forecasts about the future based on their perceptions. However, as human beings, we are subject to psychological and cognitive limitations, which can lead to suboptimal or biased choices. This dissertation investigates how such human traits shape expectations and decision-making and whether they help explain empirical patterns observed in economic data.

The first chapter studies the effect of the Federal Reserve’s communication on short-term inflation forecasts. Using micro-level survey data, I show that after the Fed adopted an explicit inflation target in 2012, individuals (1) became more confident in their beliefs with lower subjective uncertainty, and (2) less prone to overreacting to new information, aligning more closely with rational expectations. I develop a parsimonious inflation expectations model featuring smooth diagnostic expectations. The findings suggest that transparent monetary communication not only anchors long-run inflation expectations but also enhances the rationality of short-run forecasting behavior.

The second chapter applies a rational inattention model to the pre-Great Moderation era, a period marked by high macroeconomic volatility. I find that during such volatile times, households and firms respond more swiftly in their consumption and pricing decisions. A DSGE model with rational inattention generates sluggish responses to monetary, technology, and firm-specific shocks—even in the absence of Calvo pricing or habit formation. This suggests that slow adjustment dynamics in the data may reflect cognitive constraints rather than structural rigidities.

The third chapter, co-authored with Sergii Drobot, examines how political partisanship shapes individuals’ forecasting behavior. To assess the impact of electoral outcomes on expectations, we conducted two waves of surveys, with the second wave administered on the morning of November 6, 2024—immediately after the U.S. presidential election. We find that: (1) Democratic-affiliated households revise their forecasts more pessimistically, while Republican-affiliated households re-vise theirs more optimistically, particularly lowering their unemployment forecasts; (2) Republican households exhibit greater confidence, indicating reduced subjective uncertainty; and (3) despite the public nature of the news—Trump’s victory—forecast disagreement narrows among Republicans but widens among Democrats.