Ambiguous economic news and heterogeneity: what explains asymmetric consumption responses?

We study information and consumption and whether consumers respond symmetrically to good and bad news. Our news variable captures the influence of consumers’ additional information beyond the fundamental (income or productivity) on current consumption. We use the information structure in which consumers see current (and past) productivity and receive noisy signals about future evolution of productivity. Our news measure identifies the contribution of those signals to current consumption and show that it has explanatory power. To obtain this series, we structurally estimate a simple permanent income consumption model with imperfect information using the aggregate U.S. time series and extract this news series. We then test the hypothesis that consumers react more to bad news than to good news using the Panel Study of Income Dynamics (PSID) to analyze the response of households’ consumption to news about aggregate future income. Our general results confirm the importance of the arrival of new information when households set their consumption decisions. We find that our news variable helps one predict households’ consumption change and that consumption responses are larger following negative (bad) news than positive (good) news. We suggest that observed asymmetric consumption responses could be due to agents’ aversion to ambiguous information.