A Macroeconomy with Intuitive Thinkers
Type
working paper
Date Issued
2024
Author(s)
Abstract
A growing body of evidence shows that, when forming expectations, households, firms, and even experts often deviate from rational expectations, adhering to intuitive models about macroeconomic relationships that conflict with actual experience. The “stagflationary” intuitive model – high output comes with low inflation – is a prominent example. Starting with a linear difference model in Blanchard-Kahn (1980) form, we develop a generic macroeconomic framework in which expectations emerge from an interplay of two mental systems. A rigorous thinking system forms expectations corresponding to standard rational expectations. An intuitive system forms expectations based on associative memory, perturbing rational expectations. As a result, households behave as if they were subject to cognitive discounting, and autonomous innovations in intuitive expectations are a source of macroeconomic fluctuations. We illustrate the tractability of the framework by applying it to “stagflationary” expectations and a New Keynesian model.
Language
English
Contact Email Address
johannes.binswanger@unisg.ch