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. 2010 Fall;24(4):67-84.
doi: 10.1257/jep.24.4.67.

Natural Expectations and Macroeconomic Fluctuations

Andreas Fuster  1 , David Laibson  1 , Brock Mendel  1
Affiliations

Natural Expectations and Macroeconomic Fluctuations

Andreas Fuster et al. J Econ Perspect. 2010 Fall.
No abstract available

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Figures

Exhibit 1
Exhibit 1
Impulse response functions are plotted for intuitive expectations, Δxt+1 = ϕΔxt + εt+1, rational expectations, xt+1 = αxt + βxt−1 + ηt+1, and natural expectations, which is the equally weighted average. We assume that α = 1.16, and β = −0.24, which implies that ϕ = 0.20
Exhibit 2
Exhibit 2
a: Plots impulse response functions for the natural log of real U.S. Gross Domestic Product (Bureau of Economic Analysis, 1947:1 to 2009:4). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth as a moving average with 12 lags. b: Plots the impulse response functions for the U.S. unemployment rate (Labor Department, 1947:1 to 2009:12). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling the change in unemployment as a moving average model with 36 lags. c: Plots impulse response functions for ARIMA models estimated on the natural log of real net operating surplus of private enterprises as reported in the U.S. National Income and Product Accounts (Bureau of Economic Analysis, 1947:1 to 2009:4). The net operating surplus of private enterprises is reported in NIPA Table 1.10, line 12. This definition is net of capital depreciation. To adjust for inflation, we use the GDP deflator. Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth in real earnings as a moving average process with 12 lags. d: Plots impulse response functions for excess returns (1926:9 to 2010:3). Excess returns come from Kenneth French's website; they are calculated as "the value-weighted return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).” Intuitive Expectations are calculated by estimating the intuitive model, where Δxt is replaced with the excess return for period t. Rational Expectations are calculated by regressing the excess return on a moving average process with 36 lags.
Exhibit 2
Exhibit 2
a: Plots impulse response functions for the natural log of real U.S. Gross Domestic Product (Bureau of Economic Analysis, 1947:1 to 2009:4). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth as a moving average with 12 lags. b: Plots the impulse response functions for the U.S. unemployment rate (Labor Department, 1947:1 to 2009:12). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling the change in unemployment as a moving average model with 36 lags. c: Plots impulse response functions for ARIMA models estimated on the natural log of real net operating surplus of private enterprises as reported in the U.S. National Income and Product Accounts (Bureau of Economic Analysis, 1947:1 to 2009:4). The net operating surplus of private enterprises is reported in NIPA Table 1.10, line 12. This definition is net of capital depreciation. To adjust for inflation, we use the GDP deflator. Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth in real earnings as a moving average process with 12 lags. d: Plots impulse response functions for excess returns (1926:9 to 2010:3). Excess returns come from Kenneth French's website; they are calculated as "the value-weighted return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).” Intuitive Expectations are calculated by estimating the intuitive model, where Δxt is replaced with the excess return for period t. Rational Expectations are calculated by regressing the excess return on a moving average process with 36 lags.
Exhibit 2
Exhibit 2
a: Plots impulse response functions for the natural log of real U.S. Gross Domestic Product (Bureau of Economic Analysis, 1947:1 to 2009:4). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth as a moving average with 12 lags. b: Plots the impulse response functions for the U.S. unemployment rate (Labor Department, 1947:1 to 2009:12). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling the change in unemployment as a moving average model with 36 lags. c: Plots impulse response functions for ARIMA models estimated on the natural log of real net operating surplus of private enterprises as reported in the U.S. National Income and Product Accounts (Bureau of Economic Analysis, 1947:1 to 2009:4). The net operating surplus of private enterprises is reported in NIPA Table 1.10, line 12. This definition is net of capital depreciation. To adjust for inflation, we use the GDP deflator. Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth in real earnings as a moving average process with 12 lags. d: Plots impulse response functions for excess returns (1926:9 to 2010:3). Excess returns come from Kenneth French's website; they are calculated as "the value-weighted return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).” Intuitive Expectations are calculated by estimating the intuitive model, where Δxt is replaced with the excess return for period t. Rational Expectations are calculated by regressing the excess return on a moving average process with 36 lags.
Exhibit 2
Exhibit 2
a: Plots impulse response functions for the natural log of real U.S. Gross Domestic Product (Bureau of Economic Analysis, 1947:1 to 2009:4). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth as a moving average with 12 lags. b: Plots the impulse response functions for the U.S. unemployment rate (Labor Department, 1947:1 to 2009:12). Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling the change in unemployment as a moving average model with 36 lags. c: Plots impulse response functions for ARIMA models estimated on the natural log of real net operating surplus of private enterprises as reported in the U.S. National Income and Product Accounts (Bureau of Economic Analysis, 1947:1 to 2009:4). The net operating surplus of private enterprises is reported in NIPA Table 1.10, line 12. This definition is net of capital depreciation. To adjust for inflation, we use the GDP deflator. Intuitive Expectations are calculated by estimating the intuitive model. Rational Expectations are calculated by modeling growth in real earnings as a moving average process with 12 lags. d: Plots impulse response functions for excess returns (1926:9 to 2010:3). Excess returns come from Kenneth French's website; they are calculated as "the value-weighted return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from Ibbotson Associates).” Intuitive Expectations are calculated by estimating the intuitive model, where Δxt is replaced with the excess return for period t. Rational Expectations are calculated by regressing the excess return on a moving average process with 36 lags.
Exhibit 3
Exhibit 3
a: After a positive dividend shock, agents expect no future excess returns (see the line “Natural Expectations Model”). However, on average agents end up disappointed. From their perspective, the economy appears to experience more negative shocks than anticipated. Hence, realized excess returns tend to be negative, and cumulative excess returns tend to drift down (“Realized path in Natural Expectations Model”). Over the long run, cumulative excess returns converge to the rational benchmark. (See the online appendix for our definition of cumulative excess returns.) b: After a positive dividend shock, agents immediately raise consumption and anticipate that no future increases will occur (“Natural Expectations Model”). On average agents tend to be disappointed by equity returns over the next decade. Hence, consumption changes tend to be negative after a good news event (“Realized path in Natural Expectations Model”). Over the long run, consumption undershoots the rational benchmark, since agents need to “pay back” the overconsumption that occurred when they were over-optimistic about the economy’s prospects.
Exhibit 3
Exhibit 3
a: After a positive dividend shock, agents expect no future excess returns (see the line “Natural Expectations Model”). However, on average agents end up disappointed. From their perspective, the economy appears to experience more negative shocks than anticipated. Hence, realized excess returns tend to be negative, and cumulative excess returns tend to drift down (“Realized path in Natural Expectations Model”). Over the long run, cumulative excess returns converge to the rational benchmark. (See the online appendix for our definition of cumulative excess returns.) b: After a positive dividend shock, agents immediately raise consumption and anticipate that no future increases will occur (“Natural Expectations Model”). On average agents tend to be disappointed by equity returns over the next decade. Hence, consumption changes tend to be negative after a good news event (“Realized path in Natural Expectations Model”). Over the long run, consumption undershoots the rational benchmark, since agents need to “pay back” the overconsumption that occurred when they were over-optimistic about the economy’s prospects.
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