Christopher Caroll, John Hopkins University

"Sticky Expectations and Consumption Dynamics"


If consumers have accurate knowledge of their personal circumstances but ‘sticky expectations’ about the macroeconomy, conflicting micro and macro evidence about the nature of consumption dynamics can be reconciled. Sluggish aggregate spending growth, which has usually been interpreted as reflecting habits, is interpreted here as a consequence of a modest degree of macroeconomic inattention, whose utility cost is calculated to be negligible. The implications of the model are in close agreement with a simple empirical exercise designed to reproduce the key facts about the excess smoothness of aggregate consumption.