Manuscript received 7.7.11; final version received 5.7.12.
HOUSEHOLDS' FORMING SUBJECTIVE EXPECTATIONS USING PERCEIVED NEWS: DO SHOCKS TO ‘GOOD’ NEWS MATTER MORE THAN ‘BAD’ NEWS?†
Article first published online: 1 NOV 2012
© 2012 The Authors. The Manchester School © 2012 Blackwell Publishing Ltd and The University of Manchester
The Manchester School
How to Cite
EASAW, J., GHOSHRAY, A. and HERAVI, S. (2012), HOUSEHOLDS' FORMING SUBJECTIVE EXPECTATIONS USING PERCEIVED NEWS: DO SHOCKS TO ‘GOOD’ NEWS MATTER MORE THAN ‘BAD’ NEWS?. The Manchester School. doi: 10.1111/j.1467-9957.2012.02333.x
- Article first published online: 1 NOV 2012
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.