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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.
Author(s): Easaw JZ, Ghoshray A
Publication type: Article
Publication status: Published
Journal: The Manchester School
Print publication date: 21/06/2011
ISSN (print): 1463-6786
ISSN (electronic): 1467-9957
Publisher: Wiley-Blackwell Publishing Ltd.
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