Do You Know that I Know that You Know…? Higher-Order Beliefs in Survey Data. Issue 3 (30th January 2021)

• Record Type: Journal Article
• Authors: Coibion, Olivier; Gorodnichenko, Yuriy; Kumar, Saten; Ryngaert, Jane
• Is Part Of: Quarterly journal of economics. Volume 136:Issue 3(2021)
• Page Start: 1387
• Page End: 1446
• Publication Date: 2021-01-30
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1093/qje/qjab005
• Languages: English
• ISSNs: 0033-5533

Abstract

Abstract: We implement a new survey of firms, focusing on their higher-order macroeconomic expectations. The survey provides a novel set of stylized facts regarding the relationship between first-order and higher-order expectations of economic agents, including how they adjust their beliefs in response to a variety of information treatments. We show how these facts can be used to calibrate key parameters of noisy-information models with infinite regress as well as to test predictions made by this class of models. We also consider a range of extensions to the basic noisy-information model that can potentially better reconcile theory and empirics. Although some extensions like level- k thinking are unsuccessful, incorporating heterogeneous long-run priors can address the empirical shortcomings of the basic noisy-information model.