Do You Know That I Know That You Know…? Higher-Order Beliefs in Survey Data

Kumar, S
Coibion, O
Gorodnichenko, Y
Ryngaert, J
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Journal Article
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Oxford University Press (OUP)

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.

Survey; Inflation expectations; Firms; Managers
The Quarterly Journal of Economics, Volume 136, Issue 3, August 2021, Pages 1387–1446,
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© The Author(s) 2021. Published by Oxford University Press on behalf of President and Fellows of Harvard College. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (