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

Abstract

This paper studies how social communications via networks affect agents' expectations and macroeconomic shock propagation mechanisms. First, we construct a new measure of shocks to the social network using Facebook's Social Connectedness Index (SCI), which measures the number of county-to-county friendship ties. Using plausibly exogenous variation in the exposure of counties to COVID-19 shocks in their social network, we find that a 10% rise in the number of SCI-weighted cases and deaths is associated with a 0.15% and 0.42% decline in consumption expenditures, respectively. These effects are concentrated among consumer goods \& services that rely more on social-contact. Second, we augment a quantitative pandemic-consumption model under incomplete markets 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, and/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 noise in aggregation. We demonstrate how the dynamic and average size of aggregate responses depend on the location of the initial shocks and the network structure.

Keywords: Aggregate Demand, Consumption, Coronavirus, COVID-19, Expectations, Peer Effects, Social Networks

JEL Classification: D14, E21, E71, G51