an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

failures in contingent reasoning the role of uncertainty we propose a new channel to account for the difficulties of individuals with contingent reasoning the presence of uncertainty when moving from an environment with one state of known value to one with multiple possible values two changes occur first the number of values to consider increases second the value of the state is uncertain we show in an experiment that this lack of certainty or the loss of the power of certainty impedes payoff maximization and that it accounts for a substantial portion of the difficulties with contingent reasoning

price setting during low and high inflation evidence from mexico this paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of mexican consumer prices covering episodes of both low and high inflation when the annual rate of inflation is low below 10 15 the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other in contrast the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases when inflation rises beyond 10 15 few price decreases are observed and both the frequency and average magnitude are important determinants of inflation i show that a menu cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by mexico

rational heuristics expectations and behaviors in evolving economies with heterogeneous interacting agents we analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent based model populated by heterogeneous interacting firms agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change imperfect information coordination hurdles and structural breaks in these circumstances we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naive learning rules our results suggest that fast and frugal robust heuristics may not be a second best option but rather rational responses in complex and changing macroeconomic environments jel c63 d8 e32 e6 o4

imperfect information and the business cycle imperfect information has played a prominent role in modern business cycle theory this paper assesses its importance by estimating the new keynesian nk model under alternative informational assumptions one version focuses on confusion between temporary and persistent disturbances another on unobserved variation in the inflation target of the central bank a third on persistent mis perceptions of the state of the economy measurement error and a fourth assumes perfect information the standard nk dsge version imperfect information is found to contain considerable explanatory power for business fluctuations signal extraction seems to provide a conceptually satisfactory empirically plausible and quantitatively important business cycle mechanism

information rigidities inflation perceptions and the media lessons from the euro cash changeover the objective of theoretical models of information rigidities is to capture the fact that people are constrained in their ability to acquire and process all available information given that most people obtain their information about the economy from the media press coverage of the economy may exert an influence on peoples attitudes this paper tests for this influence by examining consumers inflation perceptions in the aftermath of the euro cash changeover which serves as a natural experiment using a new data set that quantifies the intensity and tone of media reports we document that media reporting has had a statistically significant and economically meaningful impact on inflation perceptions and contributed to their sharp rise in the aftermath of the euro cash changeover and to the divergence between inflation perceptions and actual inflation rates jel e53 d83

growth forecasts belief manipulation and capital markets abstract we analyze how a benevolent privately informed government agency would optimally release information about the economy s growth rate when the agents hold heterogeneous beliefs we model two types of agent conforming and dissenting the former has a prior that is identical to that of the government agency whereas the latter has a prior that differs from that of the government agency we identify both informative and uninformative equilibria informative equilibria are equilibria in which the government agency s equilibrium signal leads to a revision of beliefs we demonstrate that the uninformative equilibria can in fact dominate the informative ones in terms of ex post social welfare

monetary shocks in models with inattentive producers we study models where prices respond slowly to shocks because firms are rationally inattentive producers must pay a cost to observe the determinants of the current profit maximizing price and hence observe them infrequently to generate large real effects of monetary shocks in such a model the time between observations must be long and or highly volatile previous work on rational inattentiveness has allowed for observation intervals that are either constant but long e g caballero 1989 or reis 2006 or volatile but short e g reis s 2006 example where observation costs are negligible but not both in these models the real effects of monetary policy are small for realistic values of the duration between observations we show that non negligible observation costs produce both of these effects intervals between observations are infrequent and volatile this generates large real effects of monetary policy for realistic values of the average time between observations

local institutions audit quality and corporate scandals of us listed foreign firms using data on shareholder initiated class action lawsuits in the us i investigate the corporate scandals of us listed foreign firms the shareholders of scandal firms suffer considerable loss in both the short term and the long term i document that firms domiciled in countries with weak institutions are more likely to be embroiled in corporate scandals but such a relation can be moderated by the presence of big 4 auditors investors automatically adjust for undiscovered misconduct when valuing the stocks of non scandal firms i e the spillover effect investors rely on the audit quality to form their expectations about the severity of undiscovered misconduct and thus impose less negative spillovers on firms with big 4 auditors especially when the firms are from countries with weak institutions taken together my results suggest that listing on us exchanges does not fully compensate for weak local institutions voluntarily bonding to a more stringent audit process has an incremental effect on protecting shareholder interests and enhances the confidence of investors in firms financial integrity

asymmetric information and rational expectations when is it right to be wrong abstract in this paper we examine the effects of private agents being less than fully rational in their expectations we examine this in the context of monetary policy where the central bank may have uncertain preferences either by choice or by necessity the new feature is that we allow the public to react in two different ways they either form rational expectations and internalize the uncertainty about the central bank s preferences in full or alternatively and if this process of internalization is costly it forms a best guess regarding those preferences this implies a certainty equivalence strategy applied to the preference parameters as those parameters enter the decisions non linearly a systematic error emerges we examine the magnitude of the resulting error in inflation and output following the assumption of certainty equivalence under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full information rational expectations solution

rationally inattentive seller sales and discrete pricing prices tend to remain constant for a period of time and then jump in the literature this rigidity is usually interpreted to reflect a cost of adjusting prices this article shows that price rigidity can alternatively reflect optimal price setting when there are no adjustment costs namely if the seller is rationally inattentive the model generates non trivial pricing patterns that are consistent with the data and that are hard to explain with the traditional adjustment cost model in particular prices are adjusted frequently but move back and forth between a few given values hazard functions are downward sloping and responses to persistent shocks are sluggish these results are obtained in a model that implements rational inattention without simplifying assumptions on the functional forms of the processed signals

decomposing household professional and market forecasts on inflation a dynamic factor model analysis a dynamic factor model with stochastic volatility is used to investigate the relationships between three alternative measures of inflation expectations the results show evidence of both a common time varying trend and a common transitory component between inflation and short term inflation expectations from households professionals and markets while the common time varying trend has declined in both level and volatility since the early 1980s it was found that consumer expectations are disproportionately influenced by the visibility of prices of select few goods roughly speaking a 1 point increase in food and energy prices leads to about 1 3 point increase in consumer forecasts of inflation in terms of policymaking this finding suggests that stability in highly visible prices can moderate inflation in a meaningful way

sticky information phillips curves european evidence we estimate the sticky information phillips curve model of mankiw and reis 2002 using survey expectations of professional forecasters from four major european economies our estimates imply that in ation expectations in france germany and the united kingdom are updated about once a year in italy about once each six months

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

optimal monetary policy and transparency under informational frictions this paper examines the optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions the economy is subject to two types of shocks determining the efficient output level and firms desired markups to minimize the welfare reducing output gap and price dispersion between firms the central bank controls firms incentives and expectations by using a monetary instrument and disclosing information on the realized shocks this paper shows that an optimal policy comprises the disclosure of a linear combination of the two shocks and the adjustment of monetary instruments contingent on the disclosed information

slow information diffusion and the inertial behavior of durable consumption this paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion sid due to noisy observations and learning within the permanent income framework we show that sid can significantly improve the model s predictions on the joint behavior of income durable consumption and nondurable consumption at the aggregate level specifically we find that sid can significantly improve the model s predictions for i smoothness in durable and nondurable consumption ii autocorrelation of durable consumption and iii contemporaneous correlation between durable and nondurable consumption furthermore we discuss that incorporating a fixed cost into our sid model does a better job of reproducing the infrequent adjustments of durable consumption at the individual level and the slow adjustments at the aggregate level

modeling nonlinearity of business cycles choosing between the cdr and star models nonlinear modeling has become popular in applied macroeconomics successful attempts include beaudry and koop s cdr current depth of the recession model of real gnp and various star smooth transition autoregression models of industrial production however these models have not been directly compared we compare cdr and star models of u s real gnp and industrial production we find i within sample the cdr model fits slightly better than the star model ii out of sample the cdr model forecasts better than the star model and iii the cdr model generates very different dynamics than the star model

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

sticky prices a new monetarist approach why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level in many models prices are sticky by assumption here it is a result we use search theory with two consequences prices are set in dollars since money is the medium of exchange and equilibrium implies a nondegenerate price distribution when the money supply increases some sellers may keep prices constant earning less per unit but making it up on volume so profit stays constant the calibrated model matches price change data well but in contrast to typical sticky price models money is neutral jel e52 e31 e42

lumpy price adjustments a microeconometric analysis based on a reduced form state dependent pricing model with random thresholds we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price using this model we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in belgium and france we find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes we also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes supplementary materials for this article are available online

investor attention overconfidence and category learning abstract motivated by psychological evidence that attention is a scarce cognitive resource we model investors attention allocation in learning and study the effects of this on asset price dynamics we show that limited investor attention leads to category learning behavior i e investors tend to process more market and sector wide information than firm specific information this endogenous structure of information when combined with investor overconfidence generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models our model also demonstrates new cross sectional implications for return predictability

a quantitative comparison of sticky price and sticky information models of price setting i estimate sticky price and sticky information models of price setting for the united states via maximum likelihood techniques reaching several conclusions first the sticky price model fits best and captures inflation dynamics as well as reduced form equations once hybrid behavior is allowed second the importance of hybrid behavior in sticky price models is potentially consistent with a role for some information imperfections such as sticky information as a complement to nominal price rigidities finally the favorable results herein for the hybrid sticky price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models as this literature has largely ignored fit in evaluating such models many previous studies have focused on ancillary issues such as the standard errors associated with certain parameters or granger causality tests that may not provide much information about sticky price models

rational inattention in uncertain business cycles the paper proposes endogenous information choice as a channel through which uncertainty affects price dynamics i consider a rational inattention model with volatility uncertainty and endogenous information processing capability according to the model firms learning and optimal attention exhibits inertia and asymmetry in response to volatility changes firms choose to process more information when uncertainty rises especially about aggregate conditions and their pricing behavior changes accordingly using a markov switching factor augmented vector autoregression ms favar the paper also documents a significant positive correlation between volatility and firms responsiveness to macro and microlevel shocks consistent with model predictions

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

elastic attention risk sharing and international comovements in this paper we examine the effects of elastic information processing capacity or elastic attention proposed in sims 2010 on international consumption and income correlations in a tractable small open economy soe model with exogenous income processes we find that in the presence of capital mobility in financial markets elastic attention due to a fixed information processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty in addition we show that elastic attention can improve the model s predictions for the other key moments of the joint dynamics of consumption and income

international evidence on the efficacy of new keynesian models of inflation persistence in this paper we take an agnostic view of the phillips curve debate and carry out an empirical investigation of the relative and absolute efficacy of calvo sticky price sp sticky information si and sticky price with indexation models spi with emphasis on their ability to mimic inflationary dynamics in particular we look at evidence for a group of 13 oecd countries and we consider three alternative measures of inflationary pressure including the output gap labor share and unemployment we find that the calvo sp and the si models essentially perform no better than a strawman constant inflation model when used to explain inflation persistence indeed virtually all inflationary dynamics end up being captured by the residuals of the estimated versions of these models we find that spi model is preferable because it captures the type of strong inflationary persistence that has in the past characterized the economies of the countries in our sample however two caveats to this conclusion are that improvement in performance is driven mostly by the time series part of the model i e lagged inflation and that the spi model overemphasizes inflationary persistence thus there appears to be room for improvement via either modified versions of the above models or via development of new models that better track inflation persistence

asset pricing under information processing constraints abstract this paper studies the implications of rational inattention ri for asset pricing in a lq pih model we find that ri increases the size of risk adjustment to asset prices and expected excess returns which helps resolve extant asset pricing puzzles

choice simplification a theory of mental budgeting and naive diversification we develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste consumption opportunity and price shocks that are costly to attend to we establish that the agent often simplifies her choices by restricting attention to a few important considerations which depend on the decision at hand and affect her consumption patterns in specific ways if the agent s problem is to choose the consumption levels of many goods with different degrees of substitutability then she may create mental budgets for more substitutable products e g entertainment in some situations it is optimal to specify budgets in terms of consumption quantities but when most products have an abundance of substitutes specifying budgets in terms of nominal spending tends to be optimal if the goods are complements in contrast then the agent may consistent with naive diversification choose a fixed unconsidered mix of products and if the agent s problem is to choose one of multiple products to fulfill a given consumption need e g for gasoline or a bed then it is often optimal for her to allocate a fixed sum for the need

precommitments for financial self control micro evidence from the 2003 korean credit crisis we analyze high frequency micro panel data on customers of a major korean credit card company before and after the 2003 korean credit crisis and find evidence of pervasive precommitment behavior that is difficult to explain using standard economic theories 1 customers voluntarily reduce their credit card borrowing limits without any compensation 2 customers turn down interest free installment loan offers with high probability and 3 of the small fraction of customers who do accept interest free loan offers most precommit to pay off the loan over a shorter term than the maximum allowed term under the offer

how well does sticky information explain the dynamics of inflation output and real wages abstract this paper finds that a model with sticky information is less successful than a standard model featuring nominal rigidities inflation indexation and habits in generating the dynamics triggered by technology shocks as estimated by a vector autoregression using u s macroeconomic data the real wage responses after a permanent increase in productivity clearly favor the standard model the sticky information model fails to replicate the observed inertial response in the real wage whereas the standard model relies on inflation indexation in wage setting to achieve a better fit the two models are however statistically equivalent after a shock in monetary policy

frictions or mental gaps what s behind the information we don t use and when do we care consumers suffer significant losses from not acting on available information these losses stem from frictions such as search costs switching costs and rational inattention as well as what we call mental gaps resulting from wrong priors worldviews or relevant features of a problem not being top of mind most research studying such losses does not empirically distinguish between these mechanisms instead we show that most highly cited papers in this area presume one mechanism underlies consumer choices and assume away other potential explanations or collapse many mechanisms together we discuss the empirical difficulties that arise in distinguishing between different mechanisms and some promising approaches for making progress in doing so we also assess when it is more or less important for researchers to distinguish between these mechanisms approaches that seek to identify true value from demand without specifying mechanisms behind this wedge are most useful when researchers are interested in evaluating allocation policies that strongly steer consumers towards better options with regulation traditional policy instruments and defaults on the other hand understanding the precise mechanisms underlying consumer losses is essential to predicting the impact of mechanism policies aimed primarily at reducing specific frictions or mental gaps without otherwise steering consumers we make the case that papers engaging with these questions empirically should be clear about whether their analyses distinguish between mechanisms behind poorly informed choices and what that implies for the questions they can answer we present examples from several empirical contexts to highlight these distinctions

monetary shocks in models with observation and menu costs we study economies where price stickiness arises due to the simultaneous presence of both menu and information costs we identify the relative importance of these costs using firm s survey data and analyze the response of prices and output following a permanent unexpected monetary shock for a given frequency of price adjustment we find that the information friction significantly amplifies the real effect of the shock when the shock is small or when it is not known by firms instead when the shock is large and known to firms the flexibility of prices increases and the real effects gradually vanish

choosing between time and state dependence micro evidence on firms price reviewing strategies because of recent findings based on survey data it is now well known that firms differ from each other with respect to their price reviewing strategies while some firms review their prices at fixed intervals of time others prefer to perform price revisions in response to changes in economic conditions some theories have been suggested to explain this however empirical evidence on the relative importance of the factors that determine the different strategies of firms is virtually non existent in this paper we help to fill this gap by investigating the factors that explain why firms follow time dependent state dependent or both time and state dependent price reviewing rules we find that the strategies of firms vary with firm characteristics that have a bearing on the importance of information costs with the variability of the optimal price and with the sensitivity of profits to non optimal prices

the expected price of keeping up with the joneses abstract inflation expectations elicited in surveys have been found to exhibit large dispersion across individuals although several explanations have been proposed none fully explain this puzzle we explore in this paper a new behavioral factor social comparison using original survey data we find that respondents who feel they are falling behind compared to their peers report significantly and substantially higher inflation expectations we argue that this result is consistent with an experience based belief formation model in which those unable to keep up with the joneses overweight the high prices of aspiration goods they are unable to purchase

chronicle of a deflation unforetold suppose the nominal money supply could be cut literally overnight by say 20 what would happen to prices wages output the answer can be found in 1720s france where just such an experiment was carried out repeatedly prices adjusted instantaneously and fully on one market only that for foreign exchange prices on other markets such as commodities as well as prices of manufactured goods and industrial wages fell slowly over many months and not by the full amount of the nominal reduction coincidentally or not the industrial sector as represented by manufacturing of woolen cloths experienced a contraction of 30 when the government changed course and increased the nominal money supply overnight by 20 prices responded much more and the woolen industry rebounded

a quantized approach to rational inattention abstract in this paper i propose a model of rational inattention where the choice variable is a deterministic function of the exogenous variables and still only a finite amount of information is being used this holds provided the choice variable is discrete rather than continuous that is the mapping from the realization of the exogenous variables to the endogenous ones is piece wise constant thus limited information is now a source of lumpiness in behavior rather than a source of noise the approach is applied to a simple static model of price setting where individual price setters face aggregate monetary shocks and idiosyncratic productivity shocks the effect of aggregate money shocks on output and prices is studied it is shown that as the variance of idiosyncratic shocks become large the aggregate log price level converges to a linear function of the aggregate money shock with a coefficient which is strictly between 0 and 1 consequently unanticipated aggregate money shocks have real effects on output in contrast to the sticky price model of caplin and spulber 1987 but these effects are smaller than in standard rational inattention models or in the lucas 1972 misperception model

foundations for optimal inattention abstract this paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information an optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation net of a cognitive cost of attention the main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention observing these choices permits unique identification of the agent s utility index the information to which she pays attention her attention cost and her prior whenever information is costly

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

inattentive professional forecasters abstract using the ecb survey of professional forecasters to characterize expectations at the micro level we emphasize two new facts forecasters i fail to systematically update their forecasts and ii disagree even when updating it is moreover found that forecasters have predictable forecast errors these facts are qualitatively supportive of recent models of inattention and suggest a setup where agents imperfectly process information due to both sticky information a la mankiw reis and noisy information a la sims however building and estimating such an expectation model we find that it cannot quantitatively replicate the error and disagreement observed in the data

monetary policy shocks expectations and information rigidities this paper contributes to the literature by assessing expectation effects from monetary policy for g7 economies we rely on expectation data from consensus economics and a panel vector autoregression framework which accounts for international spillovers and time variation we analyze whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis and estimate effects of interest rate changes on expectations disagreements and forecast errors we find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters jel e31 e52

actively learning by pricing a model of an experimenting seller this article presents a model of a rational seller who is actively learning the slope of his demand curve via his pricing strategy consequently this seller optimally experiments with his price resulting price patterns show a tendency for discreteness as observed in the data which has proved to be a major challenge to most price setting models the experimentation motive can also replicate the observation that prices are more volatile than costs as well as the presence of many idiosyncratic price changes in the data it can do so without a need to assume the existence of large idiosyncratic shocks

robustly strategic consumption portfolio rules with informational frictions this paper provides a tractable continuous time constant absolute risk aversion gaussian framework to explore how the interactions of fundamental uncertainty model uncertainty due to a preference for robustness and state uncertainty due to information processing constraints rational inattention affect strategic consumption portfolio rules and precautionary savings in the presence of uninsurable labor income specifically after solving the model explicitly i compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion robustness and inattention furthermore for plausibly estimated and calibrated model parameters i quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels this paper was accepted by neng wang finance

the effects of professional forecast dissemination on macroeconomic volatility abstract this paper explores the role that professional forecast announcements can have on macroeconomic volatility bounded rational agents are used inside a medium scale dynamic stochastic general equilibrium dsge model with financial frictions modeled agents must form expectations about endogenous variables by selecting between three simple linear forecasting specifications some of which contain the inclusion of a professionally announced forecast of the economic variable historically calibrated simulations of the model show that the usage of the announced professional forecast by the agents in their adaptive learning forecast specifications can reduce the volatility in consumption inflation and wages by as much as 26 23 and 22 respectively however if the professional forecast is not disseminated well to the agents or biased in its dissemination agents will learn to ignore the announcement and macroeconomic volatility will increase further the inclusion of very noisy professional forecast signals can result in coordinated volatility cascades where agents could reduce macroeconomic volatility by ignoring the professional forecast but choose not to because of its previous forecast performance

investment dynamics with information costs investment in physical capital at the micro level is infrequent and large or lumpy the most common explanation for this is that firms face non convex physical adjustment costs the model developed in this paper shows that information costs make investment lumpy at the micro level even in the absence of non convex adjustment costs when collecting and processing information is costly the firm optimally chooses to do it sporadically and to be inactive most of the time this behavior results in infrequent and possibly large capital adjustments the model fits plant level investment rate moments well and it also matches some higher order moments of aggregate investment rates keywords investment dynamics information costs inattentiveness lumpy investment jel classification d21 d83 d92 e22

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

coarse competitive equilibrium and extreme prices we introduce a notion of coarse competitive equilibrium to study agents inability to tailor their consumption to prices our goal is to incorporate limited cognitive ability in particular limited attention memory and complexity into the analysis of competitive equilibrium compared to standard competitive equilibrium our concept yields more extreme prices and when all agents have the same endowment riskier allocations we provide a tractable model suitable for general equilibrium analysis as well as asset pricing

information theoretic approaches in economics economics has seen a recent rise in interest in information theory as an alternative framework to the conventional notion of equilibrium as a fixed state such as walrasian market clearing general equilibrium the information theoretic approach is predicated on the notion of statistical equilibrium se that takes a distribution over all possible states as an equilibrium and therefore predicts the endogenous fluctuations of the system along with its central tendency simultaneously for this reason se approaches can explain the observed data without relying on arbitrary assumptions about random noise and provide useful insights for many interesting economic problems that conventional methods have not been able to satisfactorily deal with in this paper we review the key elements of information theory focusing on the notions and applications of entropy and se in economics particularly paying attention to how entropy concepts open up a new frontline of economic research

macroeconomic expectations and time varying heterogeneity evidence from individual survey data the goal of this paper is to investigate forecast heterogeneity and time variability in the formation of expectations using disaggregated monthly survey data on macroeconomic indicators provided by

price adjustments in a general model of state dependent pricing we study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable our setup nests calvo 1983 at one extreme and a fixed menu cost model at the other all parameterizations are ranked by a measure of state dependence high state dependence implies counterfactually that there are no small price changes and that the variance of price changes falls sharply with trend inflation the parameterization that best fits microdata has low state dependence implying a phillips curve coefficient 60 as large as that of the calvo model but is nonetheless well behaved at high inflation rates

optimal central bank transparency should central banks increase their degree of transparency any further we show that there is likely to be an optimal intermediate degree of central bank transparency up to this optimum more transparency is desirable it improves the quality of private sector inflation forecasts but beyond the optimum people might 1 start to attach too much weight to the conditionality of their forecasts and or 2 get confused by the large and increasing amount of information they receive this deteriorates the perceived quality of private sector inflation forecasts as a result inflation is set in a more backward looking manner resulting in higher inflation persistence by using a large scale panel data set on the transparency of central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized our results indicate that while several central banks would benefit from further transparency increases some already have reached the optimal level

focusing effect and the poverty trap abstract i build a dynamic consumption savings model in which agents choices are distorted by the focusing effect agents overweight the utility of goods in which their options differ more i show that the consumption savings choice depends both on the marginal return on savings and on the total return on savings implying that the incentive to save may increase with the initial level of wealth as a consequence a salience based poverty trap may exist when the marginal return on savings is sufficiently high and sufficiently flat i also consider the case of a perfect credit market and show that a poverty trap may emerge when the salience of consumption is bounded above i discuss policy implications in particular imposing upon an agent a punishment for decreasing savings below a threshold leads to a higher level of savings even when the threshold triggering the punishment is not binding

when little things mean a lot on the inefficiency of item pricing laws abstract item pricing laws ipls require a price tag on every item sold by a retailer we study ipls and assess their efficiency by quantifying their costs and comparing them to previously documented benefits on the cost side we posit that ipls should lead to higher prices because they increase the costs of pricing and price adjustment we test this prediction using data collected from large supermarket chains in the tri state area of new york new jersey and connecticut we find that ipl store prices are higher by about 20 25 per item on average as a control we use data from stores that use electronic shelf labels and find that their prices fall between ipl and no ipl store prices we compare the costs of ipls to existing measures of the benefits and find that the costs are an order of magnitude higher than the upper bound of the estimated benefits

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

time variation in term premia international survey based evidence using a large previously unexplored data set of survey based interest rate forecasts that covers a broad range of countries this paper re examines the expectations hypothesis of the term structure of interest rates we find that survey based interest rate forecasts outperform not only a random walk forecast but also outperform forecasts from forward rates when using these superior survey based forecasts in a modified expectations hypothesis test the expectations hypothesis is rejected for fewer countries at lower significance levels and has greater explanatory power than when using a traditional forward rates based test we furthermore document strong time variation in the term premia which is an important reason why the traditional expectations hypothesis test is rejected so frequently this time variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure finally we find that generalizing findings from earlier u s studies to other countries may lead to bias in the true economic relationships in these countries

setting the right prices for the wrong reasons we consider a model of nominal price adjustment with firm specific and aggregate shocks to economic fundamentals and incomplete dispersed information firms update their expectations about fundamentals based on their own cash flows revenues and wages we show that in a model with realistic levels of product level price dispersion the firms inference about aggregate shocks is very gradual yet in the aggregate prices adjust rapidly in response to aggregate nominal shocks when an aggregate shock occurs firms mistakenly attribute it to firm specific shocks but adjust prices nevertheless since the exact nature of the shock matters little for its optimal pricing decision

statistical testing of bounded rationality with applications to the newsvendor model abstract in this paper we define bounded rationality in terms of probabilistic cost efficiency this establishes a framework where bounded rationality can be examined rigorously by statistical methods we apply this theory to data from laboratory experiments on the newsvendor model we enter into a theoretical discussion of the classical pull to center effect and explain why underorders are typically larger than overorders

imperfect common knowledge staggered price setting and the effects of monetary policy this paper studies the consequences of a lack of common knowledge in the transmission of monetary policy by integrating the woodford 2003a imperfect common knowledge model with taylor calvo staggered price setting models the average price set by monopolistically competitive firms depends on their higher order expectations about not only the current state of the economy but also about the states in the future periods in which prices are to be fixed this integrated model provides a plausible explanation for the observed effects of monetary policy it shows analytically how price adjustments are delayed and how the response of output to monetary disturbances is amplified

how quickly do forecasters incorporate news evidence from cross country surveys using forecasts from consensus economics inc we provide evidence on the efficiency of real gdp growth forecasts by testing whether forecast revisions are uncorrelated as the forecast data used are multi dimensional 18 countries 24 monthly forecasts for the current and the following year and 16 target years the panel estimation takes into account the complex structure of the variance covariance matrix due to propagation of shocks across countries and economic linkages among them efficiency is rejected for all 18 countries forecast revisions show a high degree of serial correlation we then develop a framework for characterizing the nature of the inefficiency in forecasts for a smaller set of countries the g 7 we estimate a var model on forecast revisions the degree of inefficiency as mananifested in the serial correlation of forecast revisions tends to be smaller in forecasts of the usa than in forecasts for european countries our framework also shows that one of the sources of the inefficiency in a country s forecasts is resistance to utilizing foreign news thus the quality of forecasts for many of these countries can be significantly improved if forecasters pay more attention to news originating from outside their respective countries this is particularly the case for canadian and french forecasts which would gain by paying greater attention than they do to news from the usa and germany respectively

classifying monetary economics fields and methods from past to future we propose a simple yet sufficiently encompassing classification scheme of monetary economics it comprises three fundamental fields and six recent areas that expand within and across these fields the elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature neither is this an attempt to produce a relatively complete systematization our intention in taking stock is not finality or exhaustiveness we rather suggest a viewpoint and a possible ordering of the accumulating knowledge our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large

a new suggestion for simplifying the theory of money we propose a new search theoretic model of monetary exchange with indivisible assets based on price posting instead of bargaining and incorporating noisy search this yields some familiar results plus a lot more the model admits multiple steady states due to the self referential nature of liquidity it admits cyclic chaotic and stochastic equilibria and compared to bargaining versions the dynamics are more general and have better microfoundations it generates price dispersion with interesting efficiency implications plus sticky prices and rational inattention parametric examples yield closed form solutions based on these results we suggest this should become a benchmark model in monetary economics

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

sticky prices and costly credit we develop a theory of money and credit as competing payment instruments then put it to work in applications agents use cash and credit because the former latter is subject to the inflation tax transaction costs frictions that make the choice of payment method interesting also imply equilibrium price dispersion we derive closed form solutions for money demand and show how to simultaneously account for the price change facts cash credit shares in micro data and money interest correlations in macro data the effects of inflation on welfare price dispersion and markups are discussed as are nonstationary equilibria with dynamics in the price distribution

a tale of two correlations evidence and theory regarding the phase shift between the price level and output abstract we examine the relationship between the price level and output at business cycle frequencies in the postwar period there is evidence of a phase shift between the price level and output such a phase shift is manifested in the price level being countercyclical and the inflation rate being procyclical or acyclical depending on the detrending method used our examination takes three approaches first we apply bootstrapping methods to characterize the two correlations though the methodology could easily be extended to any set of facts second we specify a model economy with forecast heterogeneity showing numerically that this model economy can match the observed pair of correlations third we apply robust control theory deriving conditions in which the price level is countercyclical and the inflation rate is procyclical

the puzzling evolution of the home bias information processing and financial openness abstract this paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage after financial liberalization local investors have a magnified informational advantage since information processed under autarky remains useful after liberalization a gradual shift towards foreign assets occurs as the relevance of autarkic information declines over time in the long run home bias remains large due to the interaction between information and portfolio choices empirical evidence supports the main predictions of our model namely that bias increases with information capacity and decreases with financial openness

financial crisis and persistence evidence from sticky expectations consumption growth model abstractwe estimate the degree of stickiness in aggregate consumption growth for the u s considering the effects of the great recession the behavior of stickiness estimate in the crisis is somewh

keynesian economics without the phillips curve abstract we extend farmer s 2012b monetary fm model in three ways first we derive an analog of the taylor principle and we show that it fails in u s data second we use the fact that the model displays dynamic indeterminacy to explain the real effects of nominal shocks third we use the fact the model displays steady state indeterminacy to explain the persistence of unemployment we show that the fm model outperforms the new keynesian model and we argue that its superior performance arises from the fact that the reduced form of the fm model is a vecm as opposed to a var this article is part of a special issue entitled fiscal and monetary policies

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

attention misallocation social welfare and policy implications we examine how agents allocate attention between private and public signals to reduce the uncertainty about observation noises when coordination is an important concern in this setting the attention allocation may not be monotone in endowed attention capacity agents may decrease their attention on or even ignore the more accurate signal when capacity increases as a result social welfare may decrease when they have more attention to process information and it can be even higher when agents possess a finite amount of capacity than when they have an infinite amount of capacity we derive sufficient and necessary conditions under which multiple equilibria emerge and study the implications of equilibrium multiplicity for macroeconomic policies

testing the behavior of rationally inattentive consumers in a residential water market abstract rationally inattentive consumers tend to apply simplified heuristics when making decisions we test the hypothesis of rational inattention in the context of residential water usage where water bills typically account for a small fraction of household expenditures and only attract casual attention we begin by rigorously testing whether or not residential water customers exhibit evidence of rational inattention we then propose a heuristic water demand model to explore the decision making of rationally inattentive consumers and validate the model by comparing the model with the discrete continuous choice model on attentive and fully informed decision makers in out of sample predictions