40 Pages Posted: 24 Apr 2018
Date Written: February 14, 2018
We document simultaneous over- and under-responses to new information by households, firms, and professional forecasters in survey data. Such behavior is inconsistent with existing theories based on either behavioral bias or rational inattention. We develop a structural model of information choice in which people base expectations on observables that can reconcile the seemingly contradictory facts. We show that optimally-chosen, asymmetric attention to different observables can explain the co-existence of over- and under-responses. We then embed our model of information choice into a micro-founded macroeconomic model, which generates expectations consistent with the survey data. We demonstrate that our model creates over-optimistic consumption beliefs in booms and predictability in consumption changes.
Keywords: Expectations, learning, inattention
JEL Classification: D83, D84, E32
Suggested Citation: Suggested Citation