Learning from Friends in a Pandemic: Social Networks and the Macroeconomic Response of Consumption

Abstract

This paper studies how local shocks can have aggregate effects through the effects of social networks on expectations. First, using plausibly exogenous variation in the exposure of counties to COVID-19 shocks in their social network, we find that a 10% rise in SCI-weighted cases and deaths is associated with a 0.15% and 0.42% decline in consumption expenditures. These effects are concentrated among consumer goods & services that rely more on social-contact and are not driven by local shocks. Second, we augment a quantitative pandemic-consumption model under incomplete market with a tractable mechanism of belief formation through social communications. The model is general enough to nest a number of workhorse theories of expectation formations featuring overreaction, rational updating, or stickiness. We find that, while social communication slows the speed of aggregate belief adjustment in responses to fundamentally relevant shocks, it also moderates overreaction to local noises in aggregation. We demonstrate how the dynamic and average 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