Certainty amid uncertainty: Relationship between macroeconomic uncertainty and individual expectations

We study how individual income expectations adjust during periods of high macroeconomic uncertainty, using survey data from professional forecasters and households. We find that mean expectations decrease disproportionally with rising macroeconomic uncertainty, as predicted by most economics and finance models. However, the relationship between macroeconomic uncertainty and individual subjective uncertainty is more nuanced. While there is a positive correlation among professional forecasters, it is not the case among households. In fact, for households, the correlation is often negative, contrary to what is typically predicted. In addition, subjective uncertainty shows significant persistence, even after controlling for macroeconomic and individual factors. We demonstrate that our empirical results can be reconciled with Max-Min expected utility and smooth ambiguity preferences. This has implications for economic and financial research seeking to study periods of high macroeconomic uncertainty.