Consumptor economicus: How do consumers form expectations on economic variables?

Abstract

Consumptor economicus, the economic consumer, is more complex than homo economicus. We find consumers form monthly expectations on inflation, unemployment and economic conditions based on coherent evaluations of relevant news. Relevant information is incorporated gradually, leading to a transient bias in consumer expectations, an established result. But expectations are also based on emotional responses to irrelevant events. We borrow the partisan bias from the political science and social psychology literature to identify exogenously emotional responses. Our results demonstrate that consumers also incorporate irrelevant emotive events immediately, leading to a persistent emotional bias in e..