The Island Man's behaviour: some microfoundations of how households form macroeconomic expectations
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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.
|Creators||Easaw, J. Z.and Ghoshray, A.|
|Departments||Faculty of Humanities & Social Sciences > Economics|
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