“On FIRE, News, and Expectations” “On FIRE, News, and Expectations”

The full-information rational expectations (FIRE) assumption is at the core of modern macroeconomics. This chapter revisits recent evidence which relates forecast errors of survey participants to news and rejects FIRE at different levels of aggregation. The evidence based on consensus (or aggregate) forecasts testifies against the full-information assumption, the evidence based on data for individual forecasters against rational expectations. In contrast to earlier survey evidence that was largely dismissed as irrelevant, the recent evidence may have a lasting impact for two reasons. First, the global financial crisis of 2007–2008 has led to certain uneasiness with the state of macroeconomics and a readiness to embrace new ideas. Second, the recent literature has put forward a number of promising alternative models of the expectation-formation process. These are reviewed at the end of the chapter.