Research

This paper studies whether household balance sheets shape attention to inflation and, through that channel, the transmission of macroeconomic shocks. Using data from the UK Inflation Attitudes Survey and housing tenure as a proxy for financial exposure, I show that renters pay significantly less attention to inflation than mortgagors and outright homeowners. Attention rises when inflation becomes more volatile, but the cross-household gap remains. To explain these patterns, I develop a rational inattention framework in which greater exposure to nominal assets and liabilities both raises the stakes of inflation forecast errors and lowers the effective cost of processing macroeconomic information. Consistent with this mechanism, renters display weaker knowledge of monetary policy and more passive financial decision-making. I then embed heterogeneous attention in a three-agent New Keynesian model with subjective expectations. The model implies that heterogeneity in inflation attention materially affects macroeconomic transmission: relative to full-information rational expectations, it amplifies consumption responses to expansionary monetary policy and dampens responses to cost-push shocks, with the strongest effects concentrated among liquidity-constrained households. The results identify household attention as an additional balance-sheet channel through which inflation and monetary policy affect the economy.

This paper provides empirical evidence on how the state-dependent effects of monetary policy on consumption vary across households in the United States. Households are categorized based on their balance-sheet position, proxied by housing tenure: mortgagors, renters, and outright homeowners. I distinguish between two economic states—expansions and slacks—using the unemployment gap as the baseline criterion. To estimate the dynamic effects of monetary policy, I employ a local projection model with a smooth transition specification. The results show that monetary policy shocks have a stronger stimulative effect on consumption during expansions, particularly for mortgagors and renters, who are more likely to be hand-to-mouth consumers facing liquidity constraints. This sensitivity is especially pronounced in durable goods consumption and suggests precautionary saving behavior during economic slacks. In contrast, outright homeowners exhibit stable consumption patterns across regimes, likely due to their ability to smooth spending using financial assets. The findings point to liquidity constraints and cash-flow channels as key mechanisms behind the observed heterogeneity.