A tale of inattentiveness and the loss function: A model for household-level macroeconomic expectations

Abstract

This paper presents a novel theoretical framework that integrates information stickiness with asymmetric costs of overpredicting and underpredicting macroeconomic variables. We focus on non-professional agents who exhibit these traits. The asymmetric loss function leads to the presence of a non-null bias in expectations, and information stickiness generates a positive relationship between this bias and the stickiness of expectations. At the empirical level, this relationship translates into a negative correlation, at the level of socio-demographic groups, between the mean and the standard deviation of the time series of the expectations. Three decades of data on consumers’ unemployment expectations in the US and the EU support our results, validating the hypothesized negative relationship between the mean and standard deviation of aggregate expectations. The framework is also consistent with established patterns of consumer expectations.