Sticky Information Diffusion and the Inertial Behavior of Durables Consumption∗

This paper studies the dynamics of durable and nondurable consumption under two alternative assumptions about information updating by households – rational inattention and sticky expectations. We first show that the two types of sticky information diffusion can help generate strong excess smoothness in durables consumption. We then find that sticky expectations due to a fixed cost does a better job of reproducing the infrequent adjustments of durables consumption at the individual level and the slow adjustments at the aggregate level. Finally, we show that finite information-processing capacity can by itself lead to infrequent adjustments even if there is no adjustment cost. JEL Classification Numbers: C61, D81, E21.