What Determines Household Expectations?

Abstract

This paper uses daily data on household expectations to examine what causes households to adjust their expectations about the future of the economy. We analyze several macro variables of policy interest and find that households respond primarily to movements in the unemployment rate. Further, these responses are non-linear and asymmetric, with households displaying higher sensitivity to larger shocks and to negative information indicating a worsening of the economy. We also find heterogeneity across local labor markets: Households in areas with higher local unemployment are more sensitive to changes in national unemployment than those in areas with lower local unemployment. We further examine whether media plays a role in influencing household expectations, and find that news about unemployment rises sharply during a recession, consistent with the response of expectations.

Keywords: Expectations, Economic Outlook, Unemployment, Inflation, Interest Rate

JEL Classification: E70, E66