Yuriy Gorodnichenko, the Quantedge Presidential Professor of Economics at the University of California, Berkeley, has spent years investigating how people’s beliefs about the economy influence actual economic behavior. In his upcoming book, “Expectations Matter: The New Causal Macroeconomics of Surveys and Experiments,” co-authored with Olivier Coibion, he presents evidence that expectations—what households and firms anticipate about inflation, growth, and policy—can directly shape outcomes. Using innovative survey designs and randomized trials, Gorodnichenko demonstrates causal links between expectations and decisions on spending, investment, and pricing.
Expectations are central to nearly every economic choice, from saving and investing to setting prices. Yet measuring them accurately has long been a challenge, as official statistics typically track actions rather than beliefs. Gorodnichenko and his collaborators have developed new tools to capture these intangible factors, revealing that when people expect high inflation, they act in ways that can make inflation a reality—even if underlying economic conditions don’t justify it. This self-reinforcing dynamic was evident during the post-pandemic inflation surge and echoes patterns seen in the 1970s.
Despite efforts to stabilize inflation, expectations remain elevated, particularly after sharp tariff increases on imports in April 2025. This suggests the risk of another inflation wave remains. Traditional macroeconomic models often assume individuals possess perfect information and make fully rational forecasts, but Gorodnichenko’s research shows real-world behavior is more nuanced. While people may not be perfectly informed, their decisions are often logical within the context of what they know.
The book also serves as a practical guide for researchers, offering insights into crafting effective surveys and experiments. It emphasizes clear question design, representative sampling, and aligning responses with theoretical frameworks. These methods have already influenced institutions like the IMF and the Federal Reserve.
Policymakers have learned from past crises that communication matters. Forward guidance, for example, proved less effective than models predicted because public expectations didn’t align with official assumptions. Similarly, the Federal Reserve’s shift to flexible inflation targeting in 2020 failed to deliver expected results, partly due to complexity and poor public understanding, leading to its abandonment in August of this year. Gorodnichenko argues that clarity—focusing on simple goals like price stability—is more effective than intricate policy explanations.
Berkeley’s emphasis on empirical rigor and policy relevance has fostered a thriving environment for this research. Collaborations with students and early-career scholars continue to expand the field. Looking ahead, Gorodnichenko believes organizations can build resilience by better understanding how expectations shape behavior during uncertain times, using experimentation to test communication strategies and planning approaches.
— news from UC Berkeley College of Letters & Science
— News Original —
How Expectations Shape Economic Reality: A Conversation with Yuriy Gorodnichenko
This interview originally appeared on The Berkeley Economist newsletter in October 2025. n nA leading scholar of macroeconomics and policy, Yuriy Gorodnichenko — the Quantedge Presidential Professor of Economics at the University of California, Berkeley — has spent years exploring what people believe about the economy and demonstrating that those beliefs can themselves help shape outcomes. In his forthcoming book, Expectations Matter: The New Causal Macroeconomics of Surveys and Experiments, co-authored with Olivier Coibion of the University of Texas at Austin, Gorodnichenko shows how carefully designed surveys and randomized experiments can uncover the causal links between what households and firms expect and what they do—with big implications for inflation, growth, and public confidence. n nWe spoke with him about what expectations really are, how they guide decisions from households to policymakers, and why Berkeley’s empirical traditions make it a fitting home for this kind of research. n nYour research has changed how economists think about “expectations.” Can you explain what that means—and whose expectations you’re studying? n nExpectations play a key role in most economic decisions: how much to save, how much to invest, what prices to set, etc. All these decisions depend on what we think is going to happen in a day, in a week, in a month, and so on. However, we have several big challenges when we try to quantify this role. First, expectations and choices are jointly determined, and so it is hard to establish what causes what. Second, we need more and better measures of expectations. Indeed, official data focus on measuring behavior rather than expectations. As a result, we often struggle with rationalizing the behavior without knowing what people and firms expect will happen. My wonderful coauthors and I have been trying to make progress to address these challenges. We created new surveys of expectations and used randomized controlled trials to provide some decisive evidence on how expectations affect behavior. n nInflation and consumer confidence have dominated headlines since the pandemic. How do expectations fit into those stories? How can policymakers or central banks respond when the public’s expectations don’t align with economic reality? n nThink about the inflation surge after the COVID-19 crisis. We experienced not only a big spike in inflation but also a big increase in inflation expectations. This is a situation where inflation and inflation expectations can feed on each other. Why do we have high inflation expectations? Because we have high inflation. Why do we have high inflation? Because people and firms expect high inflation and thus set higher prices, which in turn raises inflation. In this scenario, the public’s high inflation expectations, even if they are not justified by the economic fundamentals, can create a reality with high inflation, a self-fulfilling crisis. Many macroeconomists believe that this is exactly what happened in the 1970s when the U.S. and other advanced economies had double-digit inflation. n nFortunately, inflation was brought down to relatively low levels, but inflation expectations remain elevated, especially after tariffs on imported goods were raised dramatically in April 2025. This means that the inflation problem is not addressed completely, and we may get another wave of inflation. n nIn your research, what have you found that most surprised you about how people form expectations? Has anything you’ve discovered forced you to rethink a theory you once believed? n nMacroeconomic models often posit that people have full-information rational expectations. In other words, people know everything about the structure of the economy and the shocks that hit the economy; they can instantly compute optimal responses not only for themselves but also for other people. Obviously, few economists believe in these superhuman powers, but it is remarkable how much hold this framework has had on academic thinking and policy. Having been trained in this tradition, I was surprised not so much by the fact that people deviate from this unrealistic benchmark but by the fact that people are quite rational. We just need to understand what they know and how they think about the economy, and then their behavior makes a lot of sense. n nThe book seems as much about method as about results. What can readers expect to learn about designing surveys or experiments? n nThis book is like a DIY guide! We show how one can use surveys and experiments to shed light on so many issues and puzzles we have struggled with. We explain how to word questions, how to construct samples, how to relate survey responses to theoretical concepts, etc. We hope that many students and researchers will find this book useful and do their own experiments and surveys. n nYour findings have been cited by the IMF and the Federal Reserve. What have policymakers learned about managing expectations since the 2008 and 2020 crises? Should policymakers focus more on communicating their goals—or on shaping how people interpret those messages? n nNobody likes chaos and volatility, but economic crises offer a lot of variation that makes many things easy to see. For example, policymakers often assume that inflation expectations of households and firms are anchored. These two crises suggested that this is not exactly true. n nSome policies relied on full-information rational expectations to stimulate the economy, and in some sense, this was a very informative test. For instance, forward guidance, an unconventional tool for central banks, proved to be much less powerful than suggested by standard macroeconomic models. But once you allow people to have different expectations, this fact is not a puzzle. In a similar spirit, when the Federal Reserve adopted flexible inflation targeting as a new strategy in 2020, our research at the time made clear that it was unlikely to be as successful as typical models predicted because of its complexity and the fact that households and firms would not respond as predicted in those models. And unfortunately, in this case, we were right, and the Federal Reserve abandoned this strategy in its most recent review in August of this year. n nThis experience illustrated how relying on models that mischaracterize how people form expectations can be detrimental. In this case, it is better to focus on communicating goals such as low and stable inflation rather than on detailed descriptions of fairly complicated policies. Think about this: when you go to a dentist, you do not really know what the doctor does exactly, but you trust that the doctor will do the right thing. In line with this logic, Keynes famously said that he wanted to make policy as boring as dentistry. n nYou’re known for your fruitful collaborations with graduate students and early-career researchers, many of whom now lead projects inspired by your work. How do you see mentorship and collaboration shaping the next phase of this empirical approach? What makes Berkeley a particularly fertile environment for students exploring data-driven macroeconomics? n nIn many ways, research is a unique activity because you never stop looking for answers. You may nail a particular question, but this just opens up many new questions. And when you start working on expectations, it feels like questions multiply very fast! Obviously, no single person can handle this, and it is wonderful that junior scholars find this research area interesting. n nSome of this is, of course, due to the long tradition in Berkeley economics of working on policy-relevant questions, deeply caring about the data, and maintaining the highest scientific standards. I am sure that if I were not in Berkeley, if I were not exposed to the work of my wonderful colleagues, I would have never thought about running a randomized controlled trial to test a macroeconomic hypothesis. n nYou’ve shown that beliefs and perceptions can drive economic outcomes as powerfully as data itself. In periods of uncertainty, like inflation surges, financial instability, or rapid technological change, how can organizations use a better understanding of expectations to build resilience, plan ahead, or communicate more effectively with their teams and stakeholders? n nThese are terrific questions that are waiting for answers. One objective of the book is to show that we have a method to address these kinds of questions: you can run an experiment and obtain conclusive evidence of what works and what does not. To be clear, this does not mean that we can have answers immediately and, like any scientific inquiry, some detours are likely. But by testing hypotheses one by one, we eventually get there.