Shock Transmission and the Sources of Heterogeneous Expectations
This paper studies how heterogeneity in expectation formation affects the transmission of macroeconomic shocks. In a general class of macroeconomic models, I first identify a novel channel of shock transmission that works through such heterogeneity. Agents forming expectations observe information about realized variables, and pass it through a model to map from that information to the expectation of interest. I show that shocks transmit through heterogeneous expectations whenever these two components are correlated across agents: when there are systematic relationships between agents’ information and subjective models. This has broad implications, as many standard theories of bounded rationality generate such relationships if heterogeneity is permitted in both components of expectations. I then study this effect in a specific application to household beliefs around inflation. Using unique features of a UK survey, I document evidence of my novel channel in this context. In a model matching this data, transmission through expectations heterogeneity is substantial and time-varying. In particular, transitory inflation spikes may become ‘baked in’ to the expectations of certain households, with persistent effects on future shock transmission.
Date: 9 November 2022, 17:00
Venue: Nuffield College, New Road OX1 1NF
Venue Details: Staircase L Conference Room
Speaker: Alistair Macaulay (University of Oxford)
Organising department: Department of Economics
Part of: Postdoctoral Fellows Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark