Modern macroeconomic analysis typically relies heavily upon assumptions that economic agents are fully informed about their environment, and that they act on expectations that are rational given the available information. Yet empirical evidence challenges both of these benchmark assumptions and points towards significant deviations from them. Households and managers of firms often appear to be highly uninformed about the macroeconomic environment in which they operate. They make biased and persistent errors in tracking and forecasting variables such as inflation, output growth and unemployment, and their expectations are not fully consistent with those of fully rational agents.
The lab’s work in this area focuses on identifying the nature and the severity of these deviations from the full-information rational-expectations hypothesis, using both laboratory experiments and surveys of expectations in the field; and on investigating the macroeconomic implications of such deviations, by developing new micro-founded macroeconomic models that incorporate assumptions about individual behavior that are more consistent with empirical evidence.