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'The Island man's behavior': some microfoundations of how households form macroeconomic expectations

Lookup NU author(s): Professor Atanu Ghoshray


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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.

Publication metadata

Author(s): Easaw JZ, Ghoshray A

Publication type: Article

Publication status: Published

Journal: The Manchester School

Year: 2011

Volume: 79

Issue: 4

Pages: 789-810

Print publication date: 21/06/2011

ISSN (print): 1463-6786

ISSN (electronic): 1467-9957

Publisher: Wiley-Blackwell Publishing Ltd.


DOI: 10.1111/j.1467-9957.2010.02174.x


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