Full-information rational expectations (FIRE) hypothesis plays a crucial role in modern macroeconomics. It has been a building block of modern general equilibrium models, the ecient markets theory, the theory of hyperin ation and the permanent income theory of consumption.

Yet, FIRE imposes very strong assumptions on the way agents form their beliefs: not only do they fully understand the data-generating process but also know all relevant, past and current, information.

The realism of FIRE assumptions has been questioned in many papers, and many authors have proposed alternative models of expectations formation. Some have emphasized informational frictions (Mankiw and Reis (2002) and Mackowiak and Wiederholt (2015)), biases to over-extrapolate the past (Bordalo et al. (2020)), while others have advocated for under-extrapolation such as cognitive discounting (Gabaix (2020)) and level-k thinking (GarcaSchmidt and Woodford (2019) and Farhi and Werning (2019)). Importantly, over the recent years empirical literature has provided new supporting evidence of deviations from the FIRE hypothesis as well (Coibion and Gorodnichenko (2012), Coibion and Gorodnichenko (2015), Angeletos, Huo and Sastry (2020) among others), although it remains inconclusive regarding the true expectations formation process.