Attention and Fluctuations in Macroeconomic Uncertainty

I show that economic agents’ attention to macroeconomic events can increase macroeconomic uncertainty during recessions. Agents face uncertainty about the aggregate state of the economy, receive dispersed information about it, and can pay attention to acquire more information. When the economy is in a bad state, agents choose to pay more attention, and their collective response increases three common measures of uncertainty: (i) aggregate output volatility, (ii) forecast dispersion about output, and (iii) subjective uncertainty about output. Uncertainty driven by agents’ attention implies an empirical pattern of expectation updates consistent with evidence from forecast surveys and distinct from that generated by exogenous volatility shocks. When calibrated to U.S. forecast surveys, countercyclical attention accounts for half of the observed fluctuations in the three measures of uncertainty. To capture fluctuations in attention and uncertainty, I developed a method to solve higher-order dynamics of dispersed information models under an infinite regress problem.