On the Epidemiological Microfoundations of Sticky Information

Abstract

The sticky information setup assumes that information disseminates slowly throughout the population, inducing interesting dynamics in macroeconomic models. Carroll (2003) estimates an epidemiological model of expectations, providing a microfoundation for the sticky information model of Mankiw and Reis (2002). We show that this microfoundation is rather weak. Firstly, it is hard to argue that professional forecasters formed expectations rationally. Second, if we estimate an equation where expectations of households are updated towards rational expectations then the results differ dramatically. Third, by examining the time series of the median household forecaster we manage to invalidate the epidemiological microfoundation of sticky information models.

Keywords: D84, E31

JEL Classification: Inflation, expectations