Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/260863 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9733
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Using a novel decomposition, I show that systematic relationships between information and subjective models across agents distort the aggregate transmission of shocks in a general class of macroeconomic models. I document evidence of such a systematic correlation between household information and subjective models around inflation using unique features of the Bank of England Inflation Attitudes Survey: on average, households with more negative beliefs about the impacts of inflation obtain more information about inflation. A model in which acquiring information about inflation is costly, and observed information affects the perceived relationship of inflation and real incomes, can explain the empirical variation in information and subjective models in the cross-section and over time. The model generates time-varying shock transmission, and a selection effect that weakens the role of information frictions in aggregate dynamics. Through a novel channel, transitory spikes in inflation may become ‘baked in’ to inflation expectations, but only among those with the most positive subjective models of the effects of inflation.
Subjects: 
information frictions
subjective models
heterogeneous agents
expectations
shock transmission
JEL: 
D83
D84
E31
E71
Document Type: 
Working Paper
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