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Sticky Expectations and Consumption Dynamics

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  • Christopher D. Carroll

    ()
    (Department of Economics The Johns Hopkins University)

  • Johns Hopkins University

Abstract

This paper argues that a model in which consumers have accurate knowledge of their own idiosyncratic circumstances but `sticky expectations' about the macroeconomy can reconcile conflicting evidence about consumption dynamics from micro and macro data. Sluggish aggregate spending growth, which has often been interpreted as reflecting habits, emerges here as a consequence of a modest degree of macroeconomic inattention, whose utility cost is calculated to be very small. The implications of the model are in close agreement with a simple empirical exercise designed to reproduce the key facts about the excess smoothness of aggregate consumption

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 21.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:21

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Keywords: Consumption dynamics;

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Cited by:
  1. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  2. Carroll, Christopher D. & Slacalek, Jiri & Sommer, Martin, 2008. "International evidence on sticky consumption growth," Working Paper Series, European Central Bank 0886, European Central Bank.
  3. Li-gang Liu & Laurent Pauwels & Andrew Tsang, 2007. "How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption," Working Papers 0720, Hong Kong Monetary Authority.
  4. repec:nbr:nberwo:14732 is not listed on IDEAS
  5. Jiri Slacalek, 2006. "International Wealth Effects," Discussion Papers of DIW Berlin 596, DIW Berlin, German Institute for Economic Research.
  6. Libich, Jan & Stehlík, Petr, 2010. "Incorporating rigidity and commitment in the timing structure of macroeconomic games," Economic Modelling, Elsevier, vol. 27(3), pages 767-781, May.
  7. Luo, Yulei & Nie, Jun & Young, Eric R., 2014. "Robust control, informational frictions, and international consumption correlations," European Economic Review, Elsevier, vol. 67(C), pages 1-27.

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