Households forming macroeconomic expectations: inattentive behavior with social learning

Abstract

AbstractThere has been a heightened interest in how households form their macroeconomic expectations. Recent innovative studies have shown that households form their expectations by observing professionals’ forecasts albeit imperfectly. Such inattentive behavior has been used to explain inflation dynamics. The purpose of the present paper is to provide further microfoundations to the “sticky information” expectations model by incorporating social learning between households. Here, social learning is modeled through spatial local interactions: households learn from their neighbors as they form their expectations. We show the convergence of households’ expectations depends on the rate of absorbing the professional’s forecasts and the interaction rate with neighbors but also on the spatial variability of the cross-section expectation distribution. The analysis also distinguishes between active and passive households as the latter do not have access to the professional’s forecast or prefer to learn from others, such as the active households. We show that the social interactions between active and passive households can lead to non-monotonic convergence. Finally, while our model with active agents is able to match only the mean inflation expectation of the Michigan survey, our model with active and passive agents is able to replicate both the first and the second moments of the inflation expectations observed in the survey.