Inferring the Aggregate: Information Frictions and Macroeconomic Dynamics
Working paper 2026
While a large empirical literature documents sizable household-level consumption responses to cash windfalls, aggregate consumption often responds much less to countercyclical transfers. This paper argues that information frictions can help explain this gap. When households cannot directly observe aggregate conditions, countercyclical transfers are not ordinary windfalls as they signal that aggregate conditions are weak. I embed this mechanism in a heterogeneous-agent model in which households infer macroeconomic movements from their own cash flows. To solve the model, I develop a global method that combines Bayesian filtering with approximate aggregation. The model’s information mechanism is then validated against household survey results, including those from a randomized information experiment in Germany. Quantitatively, the cumulative aggregate consumption response over the first two quarters falls from more than 70 cents per initial dollar transferred under full information to about 15 cents under dispersed information, consistent with macroeconomic evidence.