The Island Man's behaviour: some microfoundations of how households form macroeconomic expectations

Joshy Z Easaw, Atanu Ghoshray

Research output: Contribution to journalArticle

Abstract

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.
Original languageEnglish
Pages (from-to)789-810
Number of pages22
JournalThe Manchester School
Volume79
Issue number4
DOIs
Publication statusPublished - Jul 2011

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