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Sticky Expectations and Consumption Dynamics

Author

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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

Suggested Citation

  • Christopher D. Carroll & Johns Hopkins University, 2006. "Sticky Expectations and Consumption Dynamics," Computing in Economics and Finance 2006 21, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:21
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    Keywords

    Consumption dynamics;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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