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Households' Forming Subjective Expectations Using Perceived News: Do Shocks to 'Good' News Matter More Than 'Bad' News?

Lookup NU author(s): Professor Atanu Ghoshray

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Abstract

The present paper examines the microfoundations of how households form subjective expectations about the macroeconomy using a novel survey-based data set. In particular, we are interested in the role of perceived news. The paper outlines a model where households may give unequal importance (or weights) to ‘good’ and ‘bad’ news. We also consider whether the relationship is state-varying and has any structural changes. The ensuing empirical investigation uses time-varying smooth transition autoregressive models. We find that weights given to the news are state-varying, with little, or no, weight given to bad news. There is also a clear structural change in the relationship after September 2001.

Publication metadata

Author(s): Easaw JZ, Ghoshray A, Heravi S

Publication type: Article

Publication status: Published

Journal: The Manchester School

Year: 2014

Volume: 82

Issue: 1

Pages: 1-16

Print publication date: 16/01/2014

Online publication date: 01/11/2012

Acceptance date: 05/07/2012

ISSN (print): 1463-6786

ISSN (electronic): 1467-9957

Publisher: Wiley-Blackwell Publishing Ltd.

URL: http://dx.doi.org/10.1111/j.1467-9957.2012.02333.x

DOI: 10.1111/j.1467-9957.2012.02333.x

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