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‘The island man's behavior’: Some microfoundations of how households form macroeconomic expectations

Easaw, Joshy and Ghoshray, Atanu 2011. ‘The island man's behavior’: Some microfoundations of how households form macroeconomic expectations. Manchester School 79 (4) , pp. 789-810. 10.1111/j.1467-9957.2010.02174.x

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Wiley-Blackwell
ISSN: 1467-9957
Last Modified: 15 Jan 2020 11:45
URI: http://orca-mwe.cf.ac.uk/id/eprint/127080

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