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


Reference:

Easaw, J. Z. and Ghoshray, A., 2011. The Island Man's behaviour: some microfoundations of how households form macroeconomic expectations. The Manchester School, 79 (4), pp. 789-810.

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Official URL:

http://dx.doi.org/10.1111/j.1467-9957.2010.02174.x

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.

Details

Item Type Articles
CreatorsEasaw, J. Z.and Ghoshray, A.
DOI10.1111/j.1467-9957.2010.02174.x
DepartmentsFaculty of Humanities & Social Sciences > Economics
RefereedYes
StatusPublished
ID Code21341

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