In nearly all cases considered to date, this leads to the conclusion that expectations of economic agents are identical or will converge over time. While this approach has given us invaluable insights in a multitude of models and applications, it faces a major empirical problem: in practice, economic agents hold widely  1  Guiso, Jappelli, and Terlizzese (1994). 2  Guiso and Parigi (1999). 3  Manski (2002). BIS central bankers’ speeches  1  differing views about the future path of economic variables, as I will illustrate throughout these remarks. Thus, recent research has focused on alternative assumptions regarding the nature of expectations held by economic agents. Measuring subjective expectations directly can inform our modeling assumptions on the information sets available to agents, and on the nature of the expectations formation and updating process.4 There are many Bayesians in the audience today. However, for the benefit of those who are not as familiar with Bayesian terminology, let me quickly define what I mean by “subjective expectations” or beliefs. This term refers to the personal probability distributions that individuals hold over uncertain events. Apart from the laws of probability and rules about how beliefs are updated with the arrival of information, there are no restrictions on these probability distributions, hence the use of the word “subjective.”5 Further, individuals might act according to their subjective beliefs without being able to fully articulate in standard forms their underlying probability distribution. Thus, a need arises to elicit these views in order to understand behavior more fully.

For example, in this month’s edition of the SCE we ask respondents what they expect the rate of inflation to be “over the 12‐month period between May 2018 and May 2019.” Our testing suggests that respondents understand this format better than that of the 5–10 year Michigan question; consumers are better able to provide their expectations over a specific time period in the future, and there is little value in asking them about a longer time horizon. In addition, we believe that the one-year two-year-forward horizon adopted in the SCE is better suited to measure inflation expectations at the medium-term horizon that matters most for central bankers, since monetary policy is expected to exert its full effect within that time frame.19 With regard to question wording, it is important to note that the Michigan Survey asks about changes in “prices in general.” The HIEP tested three alternative wordings of a potential inflation expectations question: we presented respondents with questions about the change in “prices in general” (the wording used in the Michigan survey), the change in “prices you pay,” and the “rate of inflation.” Compared with the “rate of inflation,” the phrases “prices in general” and especially “prices you pay” induced respondents to think more about their personal price experiences and to focus on specific price changes for individual items, such  17  The Michigan survey’s precise question format is as follows: First, respondents receive the question “What about the outlook for prices over the next 5 to 10 years?