Expectations about different macroeconomic aspects correlate with each other. Using Michigan Survey of Consumers (MSC), I found consumers' inflation expectation is positively correlated with expectations on unemployment status. Such a correlation is inconsistent with realized data, professionals' belief, and the standard New Keynesian Model. I then perform a structural test in the framework of noisy information model and show that consumers form their expectations on multiple macroeconomic variables jointly rather than independently, thus causing these expectations to be correlated with each other. These results imply the consumers have a subjective model about how macroeconomics variables are correlated that is different from the professionals and the reality. In particular, consumers believe economic conditions will be worse during episode with extensive inflation news, even if there's only mild inflation, causing their average expectation on inflation to co-move with that of unemployment and business condition. These patterns call for explanations on how agents form beliefs on interactions between macroeconomic variables that are different from the actual structure of data. They also suggest Central Bank should use inflation-related expectation management policy with cautious, as such policy may induce pessimistic responses among households.
Paper