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

79 Pages Posted: 17 May 2020 Last revised: 18 Jan 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: May 15, 2020


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

Suggested Citation

Makridis, Christos and Wang, Tao, Learning from Friends in a Pandemic: Social Networks and the Macroeconomic Response of Consumption (May 15, 2020). 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
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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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