Speaker: Dr. Donghai Zhang (张冬海)

Title: Macroeconomic Expectations and Limited Awareness

Schedule: Nov 5, Tu 10:00-12:00 AM

Location: 诚明楼 (Chengming Hall), Rm 315

Introduction: Donghai Zhang is an Assistant Professor at the National University of Singapore and a Research Fellow at the University of Bonn. His research centers on macroeconomics, monetary economics, and applied macroeconomics. His work has been published in leading journals, including the Journal of Monetary Economics, the Journal of the European Economic Association, and The Economic Journal.

Abstract: We use data on individual expectations from the Survey of Professional Forecasters and document a series of novel empirical facts that cannot be reconciled with the Rational Expectation hypothesis. We argue that a simple model where agents are unaware of (at least some) supply shocks and partly confounds them with demand shocks can rationalize the empirical evidence. In particular, since agents are subject to an omitted-variable bias when inferring the trade-off between output and inflation, agents perceive a “flatter” Phillips curve—a property that is consistent with our evidence. We introduce limited aware agents into an otherwise standard New-Keynesian model and show that the presence of such agents increases the output cost of reducing inflation. We also show that when LA agents try to rationalize the observed movements in inflation and output within their mis-specified model, a supply shock may display qualitative features similar to a demand shock.