Narratives about the Macroeconomy

We provide evidence on narratives about the macroeconomy—the stories people tell to explain macroeconomic phenomena—in the context of a historic surge in inflation. We measure economic narratives in open-ended survey responses and represent them as Directed Acyclic Graphs. We apply this approach in surveys with more than 10,000 US households and 100 academic experts and document three main findings. First, households' narratives are strongly heterogeneous and coarser than experts' narratives, focus more on the supply side than on the demand side, and often feature politically loaded explanations. Second, households' narratives strongly shape their inflation expectations, which we demonstrate with descriptive survey data and a series of experiments. Third, an experiment varying news consumption shows that the media is an important source of narratives. Our findings demonstrate the relevance of narratives for understanding macroeconomic expectation formation.