The Inattentive Consumer: Sentiment and Expectations

Rupal Kamdar

No 647, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Expectations play a crucial role in macroeconomic models and are commonly assumed to be full-information rational. However, information is vast, costly to obtain, and difficult to understand. Using survey data, I show that consumer beliefs about economic variables are driven by a single component: sentiment. When consumers are "optimistic" (have positive sentiment), they expect the economy to expand but inflation to decline. This correlation stands in contrast to recent U.S. experience. I explain these stylized facts with a model of a rationally inattentive consumer who faces uncertainty about fundamentals. To economize on information costs, the consumer chooses to reduce the dimensionality of the problem and obtain a signal that is a linear combination of fundamentals. Optimal information gathering results in covariances of beliefs that differ from the underlying data-generating process, and in particular leads to countercyclical price beliefs. Thus, monetary policies that aim to stimulate the economy by raising inflation expectations can have counterproductive consequences.

Date: 2019
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_647.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:647

Access Statistics for this paper

More papers in 2019 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().