Households‟ Forming Subjective Expectations Using Perceived News: Do Shocks to „Good‟ News Matter More than „Bad‟ News?

The present paper examines the microfoundations of how households form subjective expectations about the macroeconomy. In particular, we are interested in the role of perceived news. The paper outlines a theoretical model where households may give unequal importance (or weights) to „good‟ and „bad‟ news. We also consider whether the relationship is state-varying and has any structural changes. The ensuing empirical investigation uses Time-Varying Smooth Transition Autoregressive (TV-STAR) models on household survey data compiled for the US. We find that weights given to the news are state-varying, with little, or no, weight given to bad news. There is also a clear structural change in the relationship after September 2001.