This paper investigates how households form expectations about the macroeconomy. We outline a theoretical model whereby households form subjective expectations about the aggregate economy based on personal finance expectations as a reference point. The speed of updating the expectations reflects the households' willingness to incur transactions costs and may be state-varying. This forms the basis of the empirical analysis using survey-based US household data. The results indicate that while household expectations of the aggregate economy adjust to personal finance expectations, it is slow and non-linear, thereby, explaining the persistence of relative effects in the context of the Lucas-Phelps Island model.
Easaw, J. Z., & Ghoshray, A. (2011). The Island Man's behaviour: some microfoundations of how households form macroeconomic expectations. The Manchester School, 79(4), 789-810. https://doi.org/10.1111/j.1467-9957.2010.02174.x