Uncovering Subjective Models from Survey Expectations

Households perceive macroeconomic variables to move together in a way different from the patterns seen in their realizations, professionals’ forecasts, and the standard macroeconomic models. In particular, they expect unemployment rate to go up when expecting higher inflation and hears about inflation news. We perform a structural test based on a noisy-information framework and provide empirical evidence using survey expectations and newspapers’ economic reporting to show that such perceived correlations reflect subjective models instead of simply imperfect information.