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Working Paper
Endogenous Uncertainty
Clark, Todd E.; Carriero, Andrea; Marcellino, Massimiliano (2018-03-29)
We show that macroeconomic uncertainty can be considered as exogenous when assessing its effects on the U.S. economy. Instead, financial uncertainty can at least in part arise as an endogenous response to some macroeconomic developments, and overlooking this channel leads to distortions in the estimated effects of financial uncertainty shocks on the economy. We obtain these empirical findings with an econometric model that simultaneously allows for contemporaneous effects of both uncertainty shocks on economic variables and of economic shocks on uncertainty. While the traditional econometric ...
Working Papers (Old Series) , Paper 1805

Working Paper
Revisiting Risky Money
Nesmith, Travis D. (2024-11-26)
Risk was first incorporated into monetary aggregation over thirty-five years ago,using a stochastic version of the workhorse money-in-the-utility-function model.Nevertheless, the mathematical foundations of this stochastic model remain shaky.To firm the foundations, this paper employs a slightly richer probability conceptthan standard Borel-measurability, which enables me to prove the existence of awell-behaved solution and to derive stochastic Euler equations. This measurabilityapproach is long-established albeit less common in economics, possibly because the derivation of stochastic Euler ...
Finance and Economics Discussion Series , Paper 2024-090

Report
Human capital investments and expectations about career and family
Zafar, Basit; Wiswall, Matthew (2016-08-01)
This paper studies how individuals believe human capital investments will affect their future career and family life. We conducted a survey of high-ability currently enrolled college students and elicited beliefs about how their choice of college major, and whether to complete their degree at all, would affect a wide array of future events, including future earnings, employment, marriage prospects, potential spousal characteristics, and fertility. We find that students perceive large ?returns" to human capital not only in their own future earnings, but also in a number of other dimensions ...
Staff Reports , Paper 792

Report
Risk Preferences at the Time of COVID-19: An Experiment with Professional Traders and Students
Cipriani, Marco; http://fedora:8080/fcrepo/rest/objects/authors/; Angrisani, Marco; Ortiz de Zarate Pina, Julen; Guarino, Antonio (2020-05-01)
We study whether the COVID-19 pandemic has impacted risk preferences, comparing the results of experiments conducted before and during the outbreak. In each experiment, we elicit risk preferences from two sample groups: professional traders and undergraduate students. We find that, on average, risk preferences have remained constant for both pools of participants. Our results suggest that the increases in risk premia observed during the pandemic are not due to changes in risk appetite; rather, they are solely due to a change in beliefs by market participants. The findings of our paper support ...
Staff Reports , Paper 927

Working Paper
Mechanics of Linear Quadratic Gaussian Rational Inattention Tracking Problems
Fulton, Chad (2017-11-03)
This paper presents a general framework for constructing and solving the multivariate static linear quadratic Gaussian (LQG) rational inattention tracking problem. We interpret the nature of the solution and the implied action of the agent, and we construct representations that formalize how the agent processes data. We apply this infrastructure to the rational inattention price-setting problem, confirming the result that a conditional response to economics shocks is possible, but casting doubt on a common assumption made in the literature. We show that multiple equilibria and a social cost ...
Finance and Economics Discussion Series , Paper 2017-109

Working Paper
Investment decisions and negative interest rates
Bracha, Anat (2016-11-01)
While the current European Central Bank deposit rate and 2-year German government bond yields are negative, the U.S. 2-year government bond and deposit rates are positive. Insights from Prospect Theory suggest that this situation may lead to an excess flow of funds into the United States. Yet the environment of negative interest rates is different from the environment considered in Prospect Theory and subsequent literature, since decisions are framed in terms of rates of return rather than absolute amounts and the task involves the allocation of funds rather than a choice or a pricing task as ...
Working Papers , Paper 16-23

Working Paper
A New Way to Quantify the Effect of Uncertainty
Throckmorton, Nathaniel A.; Richter, Alexander W. (2017-05-04)
This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step allows us to decompose the exogenous and endogenous sources of uncertainty, calculate the effect of volatility following the cost of business cycles literature, and generate data-driven policy functions for any higherorder moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante ...
Working Papers , Paper 1705

Working Paper
Rational Inattention via Ignorance Equivalence
Müller-Itten, Michèle; Stangebye, Zachary; Armenter, Roc (2020-06-22)
We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming ...
Working Papers , Paper 20-24

Working Paper
Optimal monetary policy under model uncertainty without commitment
Orlik, Anna; Presno, Ignacio (2013-10-27)
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner trusts its own model, while a representative household uses a set of alternative probability distributions governing the evolution of the exogenous state of the economy. In such environments, unlike in the original studies of time-consistent monetary policy, managing households' expectations becomes an active channel of optimal policymaking per se, a feature that the paternalistic government seeks to exploit. We adapt recursive methods in the spirit of Abreu, Pearce, and Stacchetti (1990) ...
Working Papers , Paper 13-20

Working Paper
Appraising Home Purchase Appraisals
Lambie-Hanson, Lauren; Nakamura, Leonard I.; Calem, Paul S. (2017-07-31)
Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price. We argue that institutional features of home mortgage lending cause much of the information in appraisals to be lost: some 30 percent of recent appraisals are exactly at the home price (with less than 10 percent below it). We lay out a novel, basic theoretical framework to explain how lenders? and appraisers? incentives lead to information loss in appraisals (that is, appraisals set equal to the contract price). Such information loss is ...
Working Papers , Paper 17-23

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