Information frictions and the effects of news media bias on consumption /

Thesis Type: Postgraduate

Institution Of The Thesis: Orta Doğu Teknik Üniversitesi, Faculty of Economic and Administrative Sciences, Department of Economics, Turkey

Approval Date: 2014


Supervisor: EBRU VOYVODA


This thesis develops a model that incorporates information frictions and consumption behavior in order to explain the observations of higher volatility of consumption as well as its excess sensitivity to income in the developing countries. The information frictions in the model arise both from the information source, specified as the biased news media, and the conditions of the consumers that affect the costs they face in forming full information rational expectations. These two channels are argued to be more effective in the developing countries. The model in this thesis uses these specifications to define a heuristic by which the consumers dynamically switch their expectation structures. In each period the consumers choose from two types of expectation structures: full information rational expectations, and expectations through the information provided by the news media. The latter may be biased while the former is costlier to use. The simulation results suggest that higher degrees of information frictions cause higher volatility of consumption as well as an excess sensitivity of consumption to income. Therefore, a higher bias in the source of information as well as higher costs of forming full information rational expectations are proposed as candidates for explaining the different dynamics of consumption between the developed and the developing countries.