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

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

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

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

home sweet home home bias and international diversification among individual investors abstract a striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic market of the investor we investigate differences in home bias on an individual level by studying portfolios formed as a part of the new defined contribution pension plan in sweden we estimate the likelihood of home bias and use individuals demographic and socioeconomic features as explanatory variables our findings indicate that the likelihood of home bias is caused by both rational and irrational factors moreover we relate home bias to investors desire to hedge against inflation sophistication and overconfidence

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

year end tax induced sales and stock market seasonality the paper relates two phenomena in the stock market the high return during the month of january and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year the findings suggest that due to the taxinduced sales the price of many stocks over the last 35 years was temporarily depressed in december but recovered in the following january this price recovery is a major contributor to the high returns observed in january the tax effect is present in firms of all sizes but much more pronounced for small firms the analysis also indicates that a more precise identification of the tax switch candidates may prove that the taxinduced sales are in fact the sole contributor to the high january s returns the issue of seasonality in the stock market has attracted the attention of researchers for some time rozeff and kinney 13 present evidence of seasonality in the market index with the months of january and july having a peak return the seasonal movements in the average return in the market could not be fully accounted for by a corresponding seasonal pattern in the market risk they offer three explanations to this phenomenon tax induced sales release of accounting information and seasonal demand for cash the first explanation has received some support from recent research dyl 4 studied the effects of capital gain taxes on trading volumes of common stocks and concluded that capital gain taxes affect investors year end portfolio decisions and that this effect is in turn reflected in the trading volumes of common stocks in december p 174 mcenally 10 and branch 2 studied the effects of the tax induced trading on securities return and found that depressed stocks at the end of the year are likely to bounce back immediately after year end the existence of a pronounced seasonal behavior in the market might suggest some form of market inefficiency a strategy under which stocks are bought towards the end of the year and sold at the beginning of the following year might yield an abnormal return despite the seasonal behavior of stock returns it would be indeed surprising if this regularity which has not gone unnoticed by the financial community could be exploited to bring a risk adjusted excess return the objective of this paper is to examine jointly the two phenomena tax

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

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a declining farm workforce analysis of panel data from rural mexico analysis of nationally representative individual level panel data from 1980 to 2010 reveals a significant negative trend in the agricultural labor supply from rural mexico which is the primary source of hired workers for u s farms these findings offer an explanation for the rise over time in u s farm wages concomitants of the agricultural transformation including growth in the non farm economy falling birth rates and an increase in rural education accelerate the transition of rural mexicans out of farm work higher u s farm wages and increased border enforcement slow the transition but the combined impact of these offsetting variables is relatively small a diminishing farm labor supply has far reaching implications for farmers farm labor organizers rural communities and agricultural workers

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

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

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

asymmetric information and the lack of portfolio diversification there is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios the present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias the main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities instead of possessing superior information about the aggregate performance of the local stock market the second key assumption is based on the evidence that short selling is a costly activity

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

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

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

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

discussion of financial globalization governance and the evolution of home bias kets generally referred to as home bias is a well established empirical reg ularity french and poterba 1991 cooper and kaplanis 1994 tesar and werner 1995 lewis 1999 and many others the original findings have been replicated across a wide spectrum of countries and investor types var ious explanations have been examined over the years beginning with trans action costs and frictions then moving into informational costs kang and stulz 1997 suh 2001 ahearne griever and warnock 2004 doidge karolyi and stulz 2004 despite this long and persistent history of empir ical investigation the literature in the area has difficulty providing a robust explanation for this pervasive phenomenon financial globalization governance and the evolution of home bias by kho stulz and warnock 2008 henceforth ksw provides a potential explanation for the home bias and investigates that explanation with tests based on two different data sets they suggest that the observed home bias is a result of an optimal corporate ownership theory where firms in poor governance countries are heavily owned by insiders or large shareholders with the ability to monitor both types of shareholdings reduce the float

payout taxes and the allocation of investment when corporate payout is taxed internal equity retained earnings is cheaper than external equity share issues if there are no perfect substitutes for equity finance payout taxes may therefore have an effect on the investment of firms high taxes will favor investment by firms who can finance internally using an international panel with many changes in payout taxes we show that this prediction holds well payout taxes have a large impact on the dynamics of corporate investment and growth investment is locked in in profitable firms when payout is heavily taxed thus apart from any level effects payout taxes change the allocation of capital

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

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

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

portfolio choice attention allocation and price comovement abstract this paper models the attention allocation of portfolio investors investors choose the composition of their information subject to an information flow constraint given their expected investment strategy in the next period which is to hold a diversified portfolio in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal when investors use this private signal to update information about two assets changes in one asset affect both asset prices and may lead to asset price comovement the model also has implications for the transmission of volatility shocks between two assets

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

equity home bias a review essay this paper reviews the relatively more recent literature on equity home bias the empirical finding that people overinvest in domestic stocks relative to the optimal investment portfolio implied by the modern portfolio theory it reviews six broad classes of explanation of this puzzling phenomenon 1 hedging home risks 2 barriers to foreign investments 3 information asymmetries and 4 behavioral factors the consensus is that none of the explanations can account for the full extent of the bias by itself thus the home bias should be explained by a combination of rational and behavioral factors

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

window dressing by pension fund managers this paper takes a first look at investment strategies of managers of 769 pension funds with total assets of 129 billion at the end of 1989 the data show that managers of these funds tend to oversell stocks that have performed poorly relative sales of losers accelerate in the fourth quarter when funds portfolios are closely examined by the sponsors this result supports the view that fund managers window dress their portfolios to impress sponsors and suggests that managers are evaluated on their individual stock selections and not just aggregate portfolio performance this abstract was borrowed from another version of this item

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

the turn of the year effect and tax loss selling by institutional investors prior studies attribute the turn of the year effect whereby small capitalization stocks earn unusually high returns in early january to tax loss selling by individual investors and window dressing by institutional investors my results suggest that a significant portion of the effect on turn of the year returns that prior studies attribute to window dressing is actually attributable to tax loss selling by institutional investors among small capitalization stocks i find that institutional investors with strong tax incentives and weak window dressing incentives realize significantly more losses in the fourth quarter than in the first three quarters of the calendar year and that their fourth quarter realized losses have a significant impact on turn of the year returns a one percentage point change in these institutional investors fourth quarter realized losses scaled by a firm s market capitalization results in an increase of 47 basis points in the firm s average daily return over the first three trading days of january which represents a 46 percent change for the mean firm

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

institutions and the turn of the year effect evidence from actual institutional trades abstract using a large proprietary database of institutional trades we investigate whether institutional investors drive the turn of the year toy effect institutions that engage in window dressing tax loss selling or risk shifting will contribute to the toy effect by selling small poorly performing stocks at the end of december and or buying those same stocks at the beginning of january we find abnormal pension fund selling in small stocks with poor past performance during the final trading days in december providing some support for the window dressing hypothesis however we find little evidence that institutional tax loss selling or risk shifting trading strategies contribute to toy returns furthermore stocks with no institutional trading around the year end exhibit considerably stronger toy return patterns than stocks in which institutions trade taken together our results suggest that institutions play a limited role in driving the toy effect

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

imperfect financial integration and asymmetric information competing explanations of the home bias puzzle this paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle we develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions we also present empirical evidence that i international financial frictions are correlated to observed patterns of us investors attention and that ii the attention us investors allocate to foreign stocks helps explain home bias towards those countries even after controlling for financial integration levels ce memoire montre que l integration financiere imparfaite et l information asymetrique ne sont pas des theories concurrentes mais plutot des idees complementaires a l interieur d une resolution unifiee de l enigme du biais en faveur du marche domestique on developpe un modele d anticipations rationnelles des prix des actifs face a des investisseurs confrontes a des contraintes informationnelles et on decouvre que les avantages informationnels emergent de maniere endogene en reponse a de petites frictions financieres on montre empiriquement que i les frictions financieres internationales sont co reliees aux patterns d attention observes des investisseurs des etats unis et que ii l attention portee par les investisseurs americains aux marches financiers etrangers aide a expliquer le biais en faveur du marche domestique de ces pays meme apres avoir pris en compte les niveaux d integration financiere

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

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

home bias at the fund level this paper presents new stylized facts on the distribution of the home bias at the fund level we find i a large heterogeneity in the degree of home bias across mutual funds ii a positive correlation between the size of funds and home bias and iii a positive correlation between the size of funds the number of foreign countries and the number of sectors in which they invest these facts constitute a challenge for existing theories this abstract was borrowed from another version of this item

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

portfolio disclosures and year end price shifts commercial paper sells at an extra discount if it matures in the next calendar year but treasury bills do not the discount is apparent in downward price shifts before the year end and upward price shifts at the turn of the year that are significantly correlated with the simultaneous returns to small stocks and that cannot reflect tax loss selling cross sectional and time series tests on prices as well as flow of funds evidence on trades by institutional investors indicate that both the debt and equity patterns reflect agency problems related to portfolio disclosures financial research has brought considerable analysis to bear on the turn of the year in the equity market but not the money market extant literature starting with keim and stambaugh 1986 reports similarities between equity market and money market price shifts in january but has not examined time series and cross sections of money market prices at the high resolution common in studies of the equity market repeating tests from the equity literature on money market prices this article finds a more precise and robust characterization of the price shifts this characterization combined with observations of year end shifts in money market holdings supports the view that intermediaries move prices with strategic responses to portfolio disclosures the main empirical result is that commercial paper pays a higher yield if it matures across the end of the year that is it imputes a forward premium for the holding period from the last trading day of one year to the first trading day of the next this premium is even higher for issues with more default risk and longer maturity as measured at the end of the year and has a substantial impact on yield spreads i argue that the forward premium reflects an abnormally high market price for bearing risk across the year end and that this high price reflects the disutility to intermediaries of showing risky portfolios to claimholders or regulators the connection between portfolio disclosures and price shifts was proposed by haugen and lakonishok hl 1988 as an explanation of the equity market january effect as originally documented by keim 1983 with monthly data

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

are individual investors tax savvy evidence from retail and discount brokerage accounts using brokerage account data we analyze the tax awareness of individual investors we find strong evidence that taxes matter investors prefer to locate bonds and mutual funds in retirement accounts and in december harvest stock losses in their taxable accounts however investors also trade actively in their taxable accounts realize gains more frequently than losses and locate a material portion of their bonds in taxable accounts though taxes leave clear footprints in the data we analyze many investors could improve their after tax performance by fully capitalizing on the tax avoidance strategies available to equities while optimally locating their assets

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

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

tax loss selling and the january effect evidence from municipal bond closed end funds this paper provides direct evidence supporting the tax loss selling hypothesis as an explanation of the january effect examining turn of the year return and volume patterns for municipal bond closed end funds which are held mostly by tax sensitive individual investors we document a january effect for these funds but not for their underlying assets we provide evidence that this effect can be largely explained by tax loss selling activities at the previous year end moreover we find that funds associated with brokerage firms display more tax loss selling behavior suggesting that tax counseling plays a role among the numerous stock return anomalies probably none has generated more interest than that of the turn of the year or january effect the phenomenon in which small capitalization stocks realize unusually high returns in early january 1 the literature offers a number of hypotheses to explain this phenomenon including the tax loss selling hypothesis the window dressing hypothesis the insider trading information release hypothesis and the seasonality of the risk return relation hypothesis given existing evidence in some support for the first two hypotheses the debate continues with respect to which of these the tax loss selling of individual investors or the window dressing of

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

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

the determinants of international investment and attention allocation using internet search query data abstract this paper explores the joint determination of home bias and attention allocation we overcome the typical challenge associated with evaluating attention allocation theories by using a new internet search query dataset to measure how much information investors decide to process employing an instrumental variables approach we find empirical evidence of a two way causality between home bias and attention our estimates suggest that if all countries were to receive the same level of attention as the u s then the average home bias by u s investors would fall from 85 2 to 57 3

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

why is capital so immobile internationally possible explanations and implications for capital income taxation the evidence on international capital immobility is extensive including the lack of international portfolio diversification real interest differentials across countries and the high correlation between domestic savings and investment the authors develop a model with asymmetric information between countries that helps rationalize all the above observations and then examine the implications of this model for optimal domestic tax policy without asymmetric information past work showed that small open economies should not impose corporate income taxes with asymmetric information the optimal policy instead involves government subsidies to capital imports some omitted factors that argue against subsidizing capital imports are explored briefly copyright 1996 by american economic association

institutions and individuals at the turn of the year this article evaluates the tax loss selling hypothesis against the window dressing hypothesis as explanations for turn of the year anomalies we examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former controlling for capitalization we find that in early january late december stocks with greater individual investor interest outperform underperform stocks with greater institutional investor interest these results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value the results are most consistent with the tax loss selling hypothesis as an explanation for the turn of the year effect

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

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