Narratives about the Macroeconomy

Abstract We study narratives about the macroeconomy—the stories people tell to explain macroeconomic phenomena—in the context of a historic surge in inflation. In our empirical analysis, we field surveys with more than 10,000 US households and 100 academic experts, measure economic narratives in open-ended questions, and represent them as Directed Acyclic Graphs. Households’ narratives are strongly heterogeneous, coarser than experts’ narratives, focus more on the supply than the demand side, and often feature politically charged explanations. Moreover, narratives shape how households form inflation expectations and interpret new information, which we demonstrate in a series of experiments. Informed by these findings, our theoretical analysis incorporates narratives into an otherwise conventional New Keynesian model and demonstrates their importance for aggregate outcomes through their effect on agents’ expectations.