Expectations and Uncertainty: A Common-Source Infection Model for Selected European Countries
35 Pages Posted: 12 Dec 2017
Date Written: December 6, 2017
We present a common-source infection model for explaining the formation of expectations by households. Starting from the framework of "Macroeconomic expectations of household and professional forecasters", we augment the original model assuming that also uninformed individuals are able to update expectations according to a naive econometric process. In this novel framework, a key role is played by the parameter measuring the probability of being informed: the dynamics of this factor over time capture the level of uncertainty perceived by households. This new framework is applied to study unemployment expectations for a selected group of European countries (France, Germany, Italy and the UK). Our results show that: (i) the novel framework is supported by data on unemployment expectations; and (ii) the probability of being informed is (negatively) correlated with the level of uncertainty spread by newspapers and conveyed by Internet.
Keywords: Expectations, Unemployment
JEL Classification: D84, E24
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