Expectation Formation Following Large, Unexpected Shocks

Abstract

By matching a large database of individual macroforecaster data with the universe of sizable natural disasters across 54 countries, we identify a set of new stylized facts: forecasters are persistently heterogeneous in how often they issue or revise a forecast; information rigidity declines significantly following large, unexpected natural disaster shocks; and disagreement decreases among inattentive agents while it might increase for attentive ones. We develop a learning model that captures the two channels through which natural disaster shocks affect expectation formation: attention effect—the visibly large shocks induce immediate and synchronized updating of information for inattentive agents—and uncertainty effect—attentive agents might increase their acquisition of private information to compensate for the higher uncertainty after shocks.