Project description
Expectations data and theory to pave the way for more effective policies
In an ever-shifting economic environment, understanding the dynamics of expectations has become paramount. The sluggish response of expectations to shocks observed in stable environments raises questions about how they might behave in turbulent times. Funded by the European Research Council, the GEM project is embarking on a mission to unearth the secrets of expectations formation and their economic impact. Comprising three interconnected modules, GEM seeks to provide new empirical evidence and a groundbreaking theoretical framework. These endeavours promise to not only guide future research but also offer invaluable insights for policymakers navigating the intricacies of economic decision-making. In particular, the study of expectations will contribute to the burgeoning debate on monetary policy’s role in driving the green transition.
Objective
The goal of this proposal is to advance the research frontier on expectations formation and their economic impact. The proposal consists of three related projects that, through the provision of novel empirical evidence and the design of a new theoretical framework, can guide future research and better inform policy decisions.
Recent empirical evidence suggests that expectations react to shocks sluggishly, but—one might argue—this may only be the case because data was gathered under stable economic conditions. We plan to explore the hypothesis that expectations quickly adapt and “de-anchor” in periods of economic turmoil. If, as we conjecture, expectations are state dependent, then a better understanding of the conditions under which stickiness persists is critical for policy. We exploit survey data on a larger-than-usual set of countries and uncover new properties of expectations.
How should central banks communicate to the public? Should countries promote financial literacy? Expectations’ data helps us answer these questions by indirectly revealing the models that agents use to make forecasts. We leverage the theory of Bayesian networks to build a theoretical framework in which a fraction of less sophisticated agents fails to consider a subset of relevant macroeconomic relationships. We discipline our model using novel evidence on cross-variable properties of expectations and deliver new, actionable lessons for policy and policy communication.
The recent debate on the role of monetary policy in speeding up the green transition has attracted much attention. Yet, the full extent to which monetary policy affects green firms is still unknown. We investigate, both empirically and theoretically, the impact of interest-rate expectations on investment by clean vs. dirty firms and innovation in clean technologies. Our preliminary evidence suggests that conventional monetary policy and forward guidance may have a sizable and long-lasting impact on the environment.
Fields of science
Programme(s)
- HORIZON.1.1 - European Research Council (ERC) Main Programme
Funding Scheme
HORIZON-ERC - HORIZON ERC GrantsHost institution
20136 Milano
Italy