Households' Forming Subjective Expectations Using Perceived News: Do Shocks to ‘Good’ News Matter More Than ‘Bad’ News?
Version of Record online: 1 NOV 2012
© 2012 The Authors. The Manchester School © 2012 The University of Manchester and John Wiley & Sons Ltd
The Manchester School
Volume 82, Issue 1, pages 1–16, January 2014
How to Cite
Easaw, J., Ghoshray, A. and Heravi, S. (2014), Households' Forming Subjective Expectations Using Perceived News: Do Shocks to ‘Good’ News Matter More Than ‘Bad’ News?. The Manchester School, 82: 1–16. doi: 10.1111/j.1467-9957.2012.02333.x
- Issue online: 17 DEC 2013
- Version of Record online: 1 NOV 2012
- Manuscript Revised: 5 JUL 2012
- Manuscript Received: 7 JUL 2011
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.