Alexandre Kohlhas, IIES, Stockholm University

Asymmetric Attention

Abstract

We 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 easily account for these observations. We develop a rational theory of extrapolation based on agents’ limited attention, which is consistent with this evidence. In particular, we show that limited, asymmetric attention to different structural variables can explain the co-existence of extrapolation and underreactions. Extrapolation arises when agents choose to pay less attention to countercyclical variables. We illustrate these mechanisms in a microfounded macroeconomic model, which generates expectations that are in line with the survey data, and show that asymmetric attention increases the persistence and volatility of business cycles.

Alexandre Kohlhas is an Assistant Professor in Economics at the Institute for International Economic Studies, Stockholm University. His research seeks to combine information economics with macroeconomics and finance. He is especially interested in the macroeconomic consequences of information frictions.