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Ambiguous economic news and heterogeneity: What explains asymmetric consumption responses?

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  • Corrado, Luisa
  • Silgado-Gómez, Edgar
  • Yoo, Donghoon
  • Waldmann, Robert

Abstract

We study information and consumption and whether consumers respond symmetrically to good and bad news. Our news variable captures the influence of consumers’ additional information beyond the fundamental (income or productivity) on current consumption. We use the information structure in which consumers see current (and past) productivity and receive noisy signals about future evolution of productivity. Our news measure identifies the contribution of those signals to current consumption and show that it has explanatory power. To obtain this series, we structurally estimate a simple permanent income consumption model with imperfect information using the aggregate U.S. time series. We then use the Panel Study of Income Dynamics (PSID) to analyze the response of households’ consumption to news about aggregate future income and test the hypothesis that consumers react more to bad news than good news. Our general results confirm the importance of the arrival of new information when households set their consumption decisions. We find that our news variable helps one predict households’ consumption change and that consumption responses are larger following negative (bad) news than positive (good) news. We suggest that observed asymmetric consumption responses could be due to agents’ aversion to ambiguous information.

Suggested Citation

  • Corrado, Luisa & Silgado-Gómez, Edgar & Yoo, Donghoon & Waldmann, Robert, 2022. "Ambiguous economic news and heterogeneity: What explains asymmetric consumption responses?," Journal of Macroeconomics, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:jmacro:v:72:y:2022:i:c:s0164070422000155
    DOI: 10.1016/j.jmacro.2022.103412
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    More about this item

    Keywords

    Consumption; Asymmetry; Expectations; Noisy information; PSID;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D10 - Microeconomics - - Household Behavior - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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