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Household Consumption and Dispersed Information

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  • Adams, Jonathan J.
  • Rojas, Eugenio

Abstract

By introducing an information friction to a heterogeneous agent model, we are able to explain two patterns of small economies experiencing large income changes: (1) excess volatility in consumption and (2) household consumption elasticities that have low correlation with income. With a standard dispersed information structure, households cannot distinguish aggregate income shocks from idiosyncratic ones. Their consumption responds excessively to aggregate shocks, which they incorrectly forecast to be too persistent. This effect occurs homogeneously across the income distribution, lowering the correlation of the consumption elasticity with income. We corroborate our central mechanism using survey data on household expectations of their future earnings.

Suggested Citation

  • Adams, Jonathan J. & Rojas, Eugenio, 2024. "Household Consumption and Dispersed Information," Journal of Monetary Economics, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:moneco:v:147:y:2024:i:c:s030439322400045x
    DOI: 10.1016/j.jmoneco.2024.103592
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    More about this item

    Keywords

    Heterogeneous agents; Incomplete information; Heterogeneous beliefs; Business cycles; Consumption volatility;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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