Learning from Friends in a Pandemic: Social Networks and the Macroeconomic Response of Consumption
81 Pages Posted: 17 May 2020 Last revised: 11 Aug 2022
Date Written: August 9, 2022
Abstract
We extend a standard incomplete-market macro model to study how social networks affects households consumption via macroeconomic expectations. To motivate the model, we use exogenous variation in the exposure of counties to COVID-19 shocks in their social network to show that a 10% rise in the number of cases and deaths is associated with a 0.15% and 0.42% decline in consumption expenditures, respectively. Interestingly, these effects are concentrated among consumer goods and services that rely more on social contact and are not driven by local shocks. Next, we embed a tractable belief formation mechanism through social communications, à la DeGroot (1974) in an otherwise standard heterogeneous-agent model à la Krusell-Smith (1998) and calibrate the model to replicate our micro findings. We show a pandemic-augmented version of this model where infections initially hit a fraction of more connected regions and gradually propagated via social network helps generates macroeconomic dynamics more aligned with the empirical patterns of aggregate consumption and cross-sectional heterogeneity. We demonstrate how the dynamic and size of aggregate responses depend on the location of the initial shocks and the structure of the network.
Keywords: Aggregate Demand, Consumption, Coronavirus, COVID-19, Expectations, Peer Effects, Social Networks
JEL Classification: D14, E21, E71, G51
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