Asymmetric Attention

Alexandre N. Kohlhas and Ansgar Walther

American Economic Review, 2021, vol. 111, issue 9, 2879-2925

Abstract: We document that the expectations of households, firms, and professional forecasters in standard surveys simultaneously extrapolate from recent events and underreact to new information. Existing models of expectation formation, whether behavioral or rational, cannot account for these observations. We develop a rational theory of extrapolation based on limited attention, which is consistent with this evidence. In particular, we show that limited, asymmetric attention to procyclical variables can explain the coexistence of extrapolation and underreactions. We illustrate these mechanisms in a microfounded macroeconomic model, which generates expectations consistent with the survey data, and show that asymmetric attention increases business cycle fluctuations.

JEL-codes: C53 D83 D84 E23 E27 E32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (28)

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DOI: 10.1257/aer.20191432

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