AbstractWe document that the expectations of households, firms, and professional forecasters in standard surveys simultaneously extrapolate from recent events and underreact to new information. Existing models of expectation formation, whether behavioral or rational, cannot account for these observations. We develop a rational theory of extrapolation based on limited attention, which is consistent with this evidence. In particular, we show that limited, asymmetric attention to procyclical variables can explain the coexistence of extrapolation and underreactions. We illustrate these mechanisms in a microfounded macroeconomic model, which generates expectations consistent with the survey data, and show that asymmetric attention increases business cycle fluctuations.
CitationKohlhas, Alexandre N., and Ansgar Walther. 2021. "Asymmetric Attention." American Economic Review, 111 (9): 2879-2925. DOI: 10.1257/aer.20191432
- C53 Forecasting Models; Simulation Methods
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
- E23 Macroeconomics: Production
- E27 Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- E32 Business Fluctuations; Cycles