What people do (i.e., work, save, or spend) depends in part on what they expect the future to be. Their actions, in turn, influence what actually happens in the future. Rational expectations models of economic behavior are based on a key requirement that a person's expectations about the future be consistent with the logical consequences of their current decisions. A better understanding of many macroeconomic phenomena has been gained by the development of rational-expectations equilibrium models. Nonetheless, current economic theory leaves some crucial questions unanswered. Specifically, economic models in which multiple pairs of mutually consistent actions and expectations exist yield ambiguous predictions and policy prescriptions. This problem could be resolved if it were known how people learn from expectations. For example, in current models of the dynamics of hyperinflation, it impossible to know, with any reasonable precision, the impact of reducing government deficits on inflation. In order to better understand the causes of inflation and to discover effective counter measures, it is necessary to learn much more about how people form expectations. The purpose of this project is to develop innovative laboratory methods and to apply them to the analysis of expectation formation, inflation, and government deficits.
