Working Paper: NBER ID: w24377
Authors: Christopher D. Carroll; Edmund Crawley; Jiri Slacalek; Kiichi Tokuoka; Matthew N. White
Abstract: Macroeconomic models often invoke consumption “habits” to explain the substantial persistence of aggregate consumption growth. But a large literature has found no evidence of habits in microeconomic 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 macroeconomy. 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.
Keywords: Consumption; Expectations; Macroeconomics
JEL Codes: D83; D84; E21; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sticky expectations (D84) | Sluggish responses in consumption growth (E21) |
| Sticky expectations (D84) | Mismatch between actual and perceived economic states (E32) |
| Lag in updating perceptions (D83) | Persistence in aggregate consumption growth (E21) |
| Aggregate shocks (E19) | Informational friction (D89) |
| Persistence in aggregate consumption growth (E21) | Smoothness in aggregate consumption dynamics (D15) |
| Higher predictability of aggregate consumption growth (E21) | Lower predictability of individual household consumption growth (D12) |