Rational inattention, macroeconomic expectation, and consumption-investment behavior

Intervention 1: we provide two groups of respondents randomly with inflation forecast made by professional forecasters.
Intervention 2: we provide two groups of respondents randomly with two kinds of inflation rise, one due to a supply-side shock, and one due to a demand-side shock; then for each group three subgroups of respondents randomly with instructions of making predictions of unemployment rate, one with no instruction, one with instruction of making predictions using emotion and one with instruction of making predictions considering consequences.

Intervention 1: we provide two groups of respondents randomly with inflation forecast made by professional forecasters.
Intervention 2: we provide two groups of respondents randomly with two kinds of inflation rise, one due to a supply-side shock, and one due to a demand-side shock; then for each group three subgroups of respondents randomly with instructions of making predictions of unemployment rate, one with no instruction, one with instruction of making predictions using emotion and one with instruction of making predictions considering consequences.

2022-07-18

2022-07-25

Macroeconomic variables that consumers pay attention to when making consumption decisions

1. people who evaluate inflation as more relevant for their decision making are more likely to update their expectations toward provided information (professional forecasts).
2. When considering consequences of an increase in inflation rate due to supply-side shock, people expect higher unemployment rate than those make forecasts with emotion or no instruction.
3. When considering consequences of an increase in inflation rate due to demand-side shock, people expect lower unemployment rate than those make forecasts with emotion or no instruction.

The experiment 1 proceeds as follows: First, we ask what macroeconomic variables (such as inflation, unemployment rate, GDP growth rate, and interest rate) do consumers care about when making consumption-saving decisions and we measure people's beliefs about the interested variables. We then generate exogenous variation in macroeconomic forecasts from professional forecasters. While some respondents receive a high value of forecast, others receive a low value of forecast, which differ due to sampling variation and procedural differences. Thereafter, we measure people's expectations regarding their interested macroeconomic variables. Finally, we measure people's expectations regarding other macroeconomic variables.

The experiment 2 proceeds as follows: first, we randomly assign respondents into two groups, with one we provide a hypothetical scenario that inflation increases by 2 percentage points due to a demand-side shock and another group with the same size of increase but due to a supply-side shock. Second, for each group mentioned above, we assign respondents into three groups randomly and provide them different instructions of making predictions about the national unemployment rates. One group is provided no instruction, and one group is asked to make predictions by using emotions, and one group is asked to make predictions by considering consequences of inflation increase.

computer

individual

Yes

1000

1000

experiment 1: half respondents receive high professional forecast and half respondents receive low professional forecast
experiment 2: half respondents receive a treatment of a supply-side driven inflation increase and half respondents receive a treatment of a demand-side driven inflation increase. In each group, 1/3 of respondents make predictions of national unemployment rate with no instructions, and 1/3 of them are asked to make predictions with emotion, and 1/3 of them are asked to make predictions based on a consideration of consqences of inflation increase.

We implement an online survey to study the role of attention in macroeconomic expectation formation upon information provision. Exogenous variation in participants' subjective expectations is created by providing different professional forecasters' assessments of future inflation rate as information treatments. We find that participants paying attention to inflation respond to the information shock about inflation by significantly updating their inflation expectations, while participants paying no attention to inflation respond little. Change in inflation expectation contributes to change in macroeconomic beliefs and anticipated consumption-investment decisions. We also find evidence that respondents elicit affect-based unemployment expectation, which explains the co-movement of inflation and unemployment survey expectations. Our results demonstrate the important role of attention in households' expectation formation.

Tang and Yin (2023), "Attention, expectation updating, and subjective models of the macroeconomy", working paper.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4585303