Expectations play a central role in macroeconomics and finance, as decisions by households, firms, investors, and policymakers depend on beliefs about future inflation, output, employment, and interest rates. For many years, the dominant framework has been rational expectations, which provides discipline and tractability but increasingly conflicts with evidence from directly measured expectations. Recent data show that even professional forecasters display systematic and persistent deviations from rational expectations, with structured patterns that vary across horizons, variables, and countries. Understanding how expectations are formed and how they shape economic and financial outcomes has therefore become a central challenge.
Several key aspects of expectations remain poorly understood. First, the literature has largely focused on short-term expectations, despite the fact that many economic decisions are made over long horizons. Long-term expectations have received relatively little attention, even though systematic errors at long horizons can significantly distort economic decisions. They can also generate sizable redistribution between borrowers and lenders, a channel absent from rational-expectations models. Second, most evidence is based on single-country analyses, leaving cross-country patterns and the role of historical experiences understudied. Third, expectations are often analyzed variable by variable, even though macroeconomic models make predictions about relationships among variables.
The first part of the project addresses these gaps by studying long-term expectations. While existing work emphasizes underreaction at short horizons, the project documents systematic overreaction at long horizons and shows that this feature is closely linked to interest rates and redistribution. To interpret these patterns, the project develops a novel memory-based model of belief formation that explains both cross-horizon and cross-country variation in expectations and financial outcomes.
The second part of the project focuses on joint expectations, examining how agents form beliefs about multiple macroeconomic variables simultaneously. This approach allows the identification of perceived trade-offs—such as between inflation and real activity—that are central to policy design. The project develops a tractable model that embeds these belief distortions into an otherwise standard macroeconomic framework, enabling quantitative and policy analysis. Distorted expectations affect interest rates and long-term investment decisions—a channel that is particularly important for understanding investment toward a greener economy.
The project is inherently interdisciplinary, integrating insights from psychology on memory, learning, and attention into macroeconomics and finance, and contributing to a more realistic and empirically grounded understanding of expectation formation.
