Kieran Larkin (IIES Stockholm), 10.07.2024

This paper investigates how to recover households' expectations from consumption data when the consumption basket undergoes dramatic changes. I study consumption behavior during the Covid recession and subsequent recovery. I propose a methodology for computing a measure of robust consumption that identifies a subset of goods and services that is informative about prevailing economic circumstances. Constructing this measure in micro data, reveals new facts about the Covid recession, such as differences in the response of robust consumption by education. I combine this measure of consumption, and use it to estimate households expectations during the recession and recovery when subject to a range of shocks. This delivers estimates of changing household perceptions of the persistence of the economic shocks during the course of the Covid recession. Household beliefs are shown to have an important effect on the strength of the consumption response to government stimulus policies.