Sticky Expectations and Consumption Dynamics

This paper argues that a model in which consumers have accurate knowledge of their own idiosyncratic circumstances but `sticky expectations' about the macroeconomy can reconcile conflicting evidence about consumption dynamics from micro and macro data. Sluggish aggregate spending growth, which has often been interpreted as reflecting habits, emerges here as a consequence of a modest degree of macroeconomic inattention, whose utility cost is calculated to be very small. The implications of the model are in close agreement with a simple empirical exercise designed to reproduce the key facts about the excess smoothness of aggregate consumption