Heterogeneous Information, Subjective Model Beliefs, and the Time-Varying Transmission of Shocks

No 9733, CESifo Working Paper Series from CESifo

Abstract: Using a novel decomposition, I show that systematic relationships between information and subjective models across agents distort the aggregate transmission of shocks in a general class of macroeconomic models. I document evidence of such a systematic correlation between household information and subjective models around inflation using unique features of the Bank of England Inflation Attitudes Survey: on average, households with more negative beliefs about the impacts of inflation obtain more information about inflation. A model in which acquiring information about inflation is costly, and observed information affects the perceived relationship of inflation and real incomes, can explain the empirical variation in information and subjective models in the cross-section and over time. The model generates time-varying shock transmission, and a selection effect that weakens the role of information frictions in aggregate dynamics. Through a novel channel, transitory spikes in inflation may become ‘baked in’ to inflation expectations, but only among those with the most positive subjective models of the effects of inflation.

Keywords: information frictions; subjective models; heterogeneous agents; expectations; shock transmission (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 E71 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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