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Sticky expectations and consumption dynamics

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  • Carroll, Christopher D.
  • Crawley, Edmund
  • Slacalek, Jiri
  • Tokuoka, Kiichi
  • White, Matthew N.

Abstract

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

Suggested Citation

  • Carroll, Christopher D. & Crawley, Edmund & Slacalek, Jiri & Tokuoka, Kiichi & White, Matthew N., 2018. "Sticky expectations and consumption dynamics," Working Paper Series 2152, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182152
    Note: 1111765
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    More about this item

    Keywords

    consumption; habits; imperfect information; inattention; sticky expectations;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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