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



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.