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

See all articles by Christos Makridis

Christos Makridis

Stanford University; Columbia University - Columbia Business School; Arizona State University (ASU); Department of Veterans Affairs (VA)

Tao Wang

Department of Economics, Johns Hopkins University

Date Written: August 9, 2022


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

Suggested Citation

Makridis, Christos and Wang, Tao, Learning from Friends in a Pandemic: Social Networks and the Macroeconomic Response of Consumption (August 9, 2022). Available at SSRN: https://ssrn.com/abstract=3601500 or http://dx.doi.org/10.2139/ssrn.3601500

Christos Makridis (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
United States

Tao Wang

Department of Economics, Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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