A Macroeconomy with Intuitive Thinkers
Type
working paper
Date Issued
2025-04-13
Author(s)
Abstract
Expectation formation is a key element in macroeconomic models. A large literature documents that individuals' expectations are often influenced not only by rational but also by intuitive thinking. In this paper, we propose a tractable framework in which expectations are a priori formed in a rational thinking mode which, however, gets perturbed by intuitive thinking. The framework captures a range of phenomena. Our main focus is on subjective models of the economy that concern correlation patterns, in particular a subjective "stagflationary model", according to which higher inflation comes with lower output. This pattern has been frequently found in the recent empirical literature on subjective expectations. We derive impulse responses for an "intuitive thinking shock" and show how such a shock can have relatively persistent effects that resemble a supply shock, with no actual supply shock involved. We contribute to the development of tractable alternatives to fully rational expectations, and to the study of how non-fundamental factors can influence fluctuations in macroeconomic series.
Keywords
JEL classification: E71
E31 Behavioral macro
expectations
dual system processing
impulse responses
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A_Macroeconomy_With_Intuitive_Thinkers_Binswangeretal.pdf
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