Expectation and Wealth Heterogeneity in the Macroeconomy

Abstract

We document systematic differences in macroeconomic expectations across US households and rationalize our findings with a theory of information choice. We embed this theory into an incomplete-markets model with aggregate risk. Our model is quantitatively consistent with the pattern of expectation heterogeneity in the data. In comparison to a full-information counterpart, our model suggests substantially increased macroeconomic volatility and inequality. We show through a series of examples that neglecting the information channel can lead to erroneous conclusions about the effects of macroeconomic policies. While in the model without information choice, a wealth tax, for example, reduces wealth inequality, in our framework it reduces information acquired, leading to increased volatility and higher top-end inequality in equilibrium.