Christopher Carroll

Paper #: 02-12-070

Macroeconomists have long emphasized the importance of expectations in determining macroeconomic outcomes, and an enormous theoretical literature has developed examining many models of expectations formation. This paper proposes a new approach, based on epidemiological models, in which only a small set of agents (professional forecasters) formulate their own expectations, which then spread through the population via the news media in a manner analogous to the spread of a disease. The paper shows that the very simplest epidemiological model, called the "common source" model, does a good job of explaining the dynamics of inflation and unemployment expectations, and more complicated epidemiological models produce dynamics similar to those that emerge from the common source model.