Social Network Influence on Consumption Dynamics and Aggregate Variability

This research delves into the intricate dynamics of consumption patterns in situations where household projections of future income are influenced by fellow members within their social network. Through the integration of the sticky expectation model with the concepts of social networks and neighborhoods, the analysis showcases that empowering consumers to shape their future income expectations by assimilating information from their neighbors pertaining to the macroeconomy results in an elevated level of variance in aggregate consumption. This phenomenon stems from the amplification of social interaction, which expedites the dissemination of information about productivity shocks and thereby curbs the sluggishness of aggregate consumption. Furthermore, the model elucidates a “group think” effect: households boasting high individual productivity exhibit an inclination towards perceiving higher aggregate productivity, thereby contributing to the augmentation of aggregate consumption's variance.