Events at CERGE-EI

Etienne Briand, M.Sc.

The Université du Québec à Montréal, Canada

Abstract: We use the NY Fed’s Survey of Consumer Expectations to document a systematic relationship between U.S. households’ macroeconomic expectations and their hand-to-mouth status. We rationalize our findings by introducing rational inattention in an environment that resembles a Two-Agent New Keynesian model. Real heterogeneity leads households of different types to choose distinct signals, even when facing identical marginal costs of attention. The model calibrated with microdata from the Survey of Consumer Finances delivers predictions regarding households’ expectations that are consistent with those measured in the data. Using vintages of finance survey, we show that variations in the fraction and characteristics of hand-to-mouth households affects how the economy responds to aggregate shocks through endogenous attention allocation. Furthermore, neglecting this channel can lead to erronous conclusions about the effects of economic policies.

Keywords: information choice, rational inattention, business cycles, heterogenous agents, monetary policy, borrowing limit, transfer policies
JEL Codes: D83, E21, E31, E32, E71

Full Text: Rational Inattention and Real Heterogeneity