How do expectations respond to new information? Evidence from survey data and a laboratory experiment.

• Applicant: Dr. Joep Lustenhouwer
• Subject Area: Economic Theory ; Economic Policy, Applied Economics
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 504576228

The research project investigates how the expectations of economic actors respond to different types of new information. In particular, the project aims to find out whether there is overreaction or underreaction to new information and whether this depends on the type of information and on the (democratic) characteristics of the forecasters that are considered. We will use innovative methods to construct two unique datasets that can address the limitations of the existing literature on this topic. In particular, we will first construct a new, daily measure of new information based on a machine learning model that can analyze trends in newspaper articles. Additionally, we will obtain expectations data by conducting a laboratory experiment where we control the different random processes that generate new information for the subjects. Both these endeavors will result in clear measures of new information that can be used to directly identify to what extent expectations over- or underreact to different types of new information. In the existing literature this is generally not possible. Moreover, the focus in the literature has mainly been on surveys of professional forecasters, and relatively little progress has been made in studying heterogeneity in over- and underreaction to new information within and across different groups of economic actors such as households. By leveraging daily variation in a monthly household survey and running a laboratory experiment on a sample of the general population, we will obtain valuable new insights in these issues. The results of the project will have direct implications for desirable central bank communication strategies. Moreover, the project results will indicate what modifications need to be made in order to converge to a new benchmark model of expectation formation. Such a modified expectations model can, in future research, be used in macroeconomic models in order to obtain more robust policy implications.

• DFG Programme: Research Grants