Household Consumption and Dispersed Information

Jonathan Adams and Eugenio Rojas

Journal of Monetary Economics, 2024, vol. 147, issue C

Abstract: By introducing an information friction to a heterogeneous agent model, we are able to explain two patterns of small economies experiencing large income changes: (1) excess volatility in consumption and (2) household consumption elasticities that have low correlation with income. With a standard dispersed information structure, households cannot distinguish aggregate income shocks from idiosyncratic ones. Their consumption responds excessively to aggregate shocks, which they incorrectly forecast to be too persistent. This effect occurs homogeneously across the income distribution, lowering the correlation of the consumption elasticity with income. We corroborate our central mechanism using survey data on household expectations of their future earnings.

Keywords: Heterogeneous agents; Incomplete information; Heterogeneous beliefs; Business cycles; Consumption volatility (search for similar items in EconPapers)
JEL-codes: D84 E21 E32 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Household Consumption and Dispersed Information (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:147:y:2024:i:c:s030439322400045x

DOI: 10.1016/j.jmoneco.2024.103592

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