Christopher Carroll, Johns Hopkins University. "Sticky Expectations and Consumption Dynamics"
Department seminar. Christopher Carroll is a professor at the Johns Hopkins University. He will present the paper "Sticky Expectations and Consumption Dynamics". Coauthored by Edmund Crawley, Jiri Slacalek, Kiichi Tokuoka and Matthew N. White.
To match aggregate consumption dynamics, macroeconomic models must generate ‘excess smoothness’ in consumption expenditures. But microfounded models are calibrated to match micro data, which exhibit no ‘excess smoothness.’ So standard microfounded models fail to match the macro smoothness facts. We show that the micro and macro evidence are both consistent with a microfounded model where consumers know their personal circumstances but have ‘sticky expectations’ about the macroeconomy. Aggregate consumption sluggishness reﬂects consumers’ imperfect attention to aggregate shocks. Our proposed degree of inattention has negligible utility costs because aggregate shocks constitute a tiny proportion of the uncertainty that consumers face.