Search Results
Working Paper
Attention and a Paradox of Uncertainty
I show that macroeconomic uncertainty during recessions can arise from people paying more attention to aggregate events. When information is dispersed, people's attempts to acquire more information can lead to higher aggregate volatility, forecast dispersion, and uncertainty about aggregate output. Information rigidity is reduced, consistent with evidence in forecast surveys, and distinct from the prediction of exogenous volatility shocks. When the model is calibrated to U.S. data, endogenous attention accounts for half of the observed fluctuations in volatility, forecast dispersion, and ...
Working Paper
The Effect of Safe Assets on Financial Fragility in a Bank-Run Model
Risk-averse investors induce competitive intermediaries to hold safe assets, thereby lowering the probability of a run and reducing financial fragility. We revisit Goldstein and Pauzner (2005), who obtain a unique equilibrium in the banking model of Diamond and Dybvig (1983) by introducing risky investment and noisy private signals. We show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset ...
Working Paper
Attention and Fluctuations in Macroeconomic Uncertainty
I show that economic agents’ attention to macroeconomic events can increase macroeconomic uncertainty during recessions. Agents face uncertainty about the aggregate state of the economy, receive dispersed information about it, and can pay attention to acquire more information. When the economy is in a bad state, agents choose to pay more attention, and their collective response increases three common measures of uncertainty: (i) aggregate output volatility, (ii) forecast dispersion about output, and (iii) subjective uncertainty about output. Uncertainty driven by agents’ attention implies ...
Working Paper
Do You Even Crypto, Bro? Cryptocurrencies in Household Finance
Using repeated large-scale surveys of US households, we study the cryptocurrency investment decisions and motives of households relative to other financial assets. Cryptocurrency holders tend to be young, male, and more libertarian relative to non-crypto holders. Crypto holders expect much higher rates of return for crypto and perceive it as relatively safer than non-holders do. For those holding cryptocurrencies, changes in Bitcoin prices translate into their purchases of durable goods. Finally, information about historical returns of cryptocurrencies in an information provision experiment ...
Report
How do college students form expectations?
This paper focuses on how college students form expectations about various major-specific outcomes. For this purpose, I collect a panel data set of Northwestern University undergraduates that contains their subjective expectations about major-specific outcomes. Although students tend to be overconfident about their future academic performance, they revised their expectations in expected ways. The updating process is found to be consistent with a Bayesian learning model. I show that learning plays a role in the decision to switch majors, and that major-switchers respond to information from ...
Report
Can subjective expectations data be used in choice models? Evidence on cognitive biases
A pervasive concern with the use of subjective data in choice models is that the data are biased and endogenous. This paper examines the extent to which cognitive biases plague subjective data, specifically addressing 1) whether cognitive dissonance affects the reporting of beliefs, and 2) whether individuals exert sufficient mental effort when probed about their subjective beliefs. For this purpose, I collect a unique panel data set of Northwestern University undergraduates that contains their subjective expectations about outcomes specific to different majors in their choice set. I do not ...
Report
Economics of Property Insurance
We study the economics of homeowners’ property insurance by examining how contract design balances the trade-off between incentive alignment and risk sharing. Using granular contract-level property insurance data merged with property-level disaster risk for millions of U.S. households, we develop and structurally estimate a model in which insurers optimally determine contract terms given property risk and household risk preferences. The estimates provide, to our knowledge, the first large-scale contract-level structural measures of risk aversion, risk premia, and the cost of moral hazard, ...
Working Paper
Rationally Inattentive Consumer: An Experiment
This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about it. The informativeness of the signals directly relates to the cognitive effort required to process the information. We find that subjects? behavior is largely in line with the predictions of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes ...
Discussion Paper
How Much Is Priced In? Market Expectations for FOMC Rate Hikes from Different Angles
It is essential for policymakers and financial market participants to understand market expectations for the path of future policy rates because these expectations can have important implications for financial markets and the broader economy. In this post?which is meant to complement prior Liberty Street Economics posts, including Crump et al. (2014a, 2014b ) and Brodsky et al. (2016a, 2016b)?we offer some insights into estimating and interpreting market expectations for increases in the federal funds target range at upcoming meetings of the Federal Open Market Committee (FOMC).
Working Paper
Understanding the Aggregate Effects of Credit Frictions and Uncertainty
We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. To do so, uncertainty is modeled as time-varying stochastic volatitlity - the product of monetary policy uncertainty, financial risk (micro-uncertainty), and macrouncertainty. The model is solved using a pruned third-order approximation and estimated by the Simulated Method of Moments. We find that: 1) Micro-uncertainty aggravates the information asymmetry between lenders and borrowers, worsens credit conditions, and has first-order effects on real economic activity. 2) When credit conditions are ...