Sticky Expectations and Consumption Dynamics

Macroeconomic models often invoke consumption “habits†to explain the substantial persistence of aggregate consumption growth. But a large literature has found no evidence of habits in microeconomic datasets that measure the behavior of individual households. The paper shows that the apparent conflict can be explained by a model in which consumers have accurate knowledge of their personal circumstances but ‘sticky expectations’ about the macroeconomy. In the model, the persistence of aggregate consumption growth reflects consumers’ imperfect attention to aggregate shocks. The proposed degree of (macro) inattention has negligible utility costs, because aggregate shocks constitute only a tiny proportion of the uncertainty that consumers face.