Stuck in the Seventies: Gas Prices and Macroeconomic Expectations

27 Pages Posted: 26 Oct 2018 Last revised: 22 May 2019

See all articles by Carola Binder

Carola Binder

Haverford College - Department of Economics

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Government of the United States of America - Council of Economic Advisors

Date Written: May 20, 2019

Abstract

Using daily consumer survey data, we analyze the transmission of gas prices to consumer beliefs and expectations about the economy. We exploit the high frequency and geographic disaggregation of our dataset to facilitate identification. Consumer sentiment becomes more pessimistic with rising gas prices. This effect is strongest for consumers who lived through the recessionary oil crises in the 1970s, consistent with models of learning from personal experience. For younger respondents, the sensitivity of sentiment to gas prices is stronger for college-educated respondents. We use web search data to study how consumers deliberately acquire information to supplement or substitute for personal experience to interpret economic conditions. Our results also provide an additional amplification mechanism for the macroeconomic effects of energy price changes.

Keywords: Consumer sentiment, macroeconomic expectations, selective attention, gas prices, behavioral macroeconomics

JEL Classification: E21, E32, E71, D12, D83, D84

Suggested Citation

Binder, Carola and Makridis, Christos, Stuck in the Seventies: Gas Prices and Macroeconomic Expectations (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3267721 or http://dx.doi.org/10.2139/ssrn.3267721

Carola Binder

Haverford College - Department of Economics ( email )

Haverford, PA 19041
United States

Christos Makridis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Government of the United States of America - Council of Economic Advisors ( email )

Eisenhower Executive Office Building
17th and Pennsylvania Avenue, NW
Washington, DC 20502
United States

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