Expectation Formation Following Large Unexpected Shocks

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Authors S. Richard Baker, Tucker S. McElroy, Xuguang Simon Sheng
Journal/Conference Name Review of Economics and Statistics
Paper Category
Paper Abstract By matching a large database of individual macro-forecaster data with the universe of sizable natural disasters across 54 countries, we identify a set of new stylized facts: (i) forecasters are persistently heterogeneous in how often they issue or revise a fore-cast; (ii) information rigidity declines significantly following large, unexpected natural disaster shocks; (iii) disagreement decreases among inattentive agents while it might increase for attentive ones. We develop a learning model that captures the two channel-s through which natural disaster shocks affect expectation formation: attention effect – the visibly large shocks induce immediate and synchronized updating of informa-tion for inattentive agents, and uncertainty effect – attentive agents might increase their acquisition of private information to compensate for the higher uncertainty after shocks.
Date of publication 2019
Code Programming Language R
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