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We propose a method to measure people's subjective models of the macroecon-
omy. Using a representative sample of the US population and a sample of experts
we study how expectations about the unemployment rate and the inflation rate
change in response to four different hypothetical exogenous shocks: a monetary
policy shock, a government spending shock, a tax shock, and an oil price shock.
While expert predictions are mostly quantitatively aligned with standard dynamic
stochastic general equilibrium models and vector auto-regression evidence, there is
strong heterogeneity in the predictions in the representative panel. While house-
holds predict changes in unemployment qualitatively in line with the experts for
all four shocks, their predictions of changes in inflation are at odds with those of
experts both for the tax shock and the interest rate shock. People's beliefs about
the micro mechanisms through which the different macroeconomic shocks are prop-
agated in the economy strongly affect how aligned their predictions are with those
of the experts. More educated and older respondents form their expectations more
in line with experts, consistent with roles for cognitive limitations and learning
over the life-cycle. Our findings inform the validity of central assumptions about
the expectation formation process and have important implications for the optimal
design of fiscal and monetary policy.
