Sticky expectations and consumption dynamics

Macroeconomic models often invoke consumption "habits" to explain the substantial persistence of macroeconomic consumption growth. to explain the substantial But a large literature has found no evidence of habits in the micro-economic datasets that measure the behavior of individual househ...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Carroll, Christopher D, Crawley, Edmund, Slacalek, Jiri, Tokuoka, Kiichi, White, Matthew N
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Consumption
Economic models
Macroeconomics
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Summary:Macroeconomic models often invoke consumption "habits" to explain the substantial persistence of macroeconomic consumption growth. to explain the substantial But a large literature has found no evidence of habits in the micro-economic datasets that measure the behavior of individual households. We show that the apparent conflict can be explained by a model in which consumers have accurate knowledge of their personal circumstances but `sticky expectations' about the macro-economy. In our model, the persistence of aggregate consumption growth reflects consumers' imperfect attention to aggregate shocks. Our proposed degree of (macro) inattention has negligible utility costs, because aggregate shocks constitute only a tiny proportion of the uncertainty that consumers face. JEL Classification: D83, D84, E21, E32