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Working Paper
What we don’t know doesn’t hurt us: rational inattention and the permanent income hypothesis in general equilibrium
Young, Eric R.; Wang, Gaowang; Luo, Yulei; Nie, Jun (2014-11-01)
This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003,2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that,under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete ...
Research Working Paper , Paper RWP 14-14

Report
Fundamental disagreement
Moench, Emanuel; Eusepi, Stefano; Andrade, Philippe; Crump, Richard K. (2013-12-01)
We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two ...
Staff Reports , Paper 655

Working Paper
Flipping the Housing Market
Tse, Chung-Yi; Leung, Charles Ka Yui (2017-01-01)
We add arbitraging middlemen -- investors who attempt to profit from buying low and selling high -- to a canonical housing market search model. Flipping tends to take place in sluggish and tight, but not in moderate, markets. There is the possibility of multiple equilibria. In one equilibrium, most, if not all, transactions are intermediated, resulting in rapid turnover, a high vacancy rate, and high housing prices. In another equilibrium, few houses are bought and sold by middlemen. Turnover is slow, few houses are vacant, and prices are moderate. Moreover, flippers can enter and exit en ...
Globalization Institute Working Papers , Paper 301

Working Paper
The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession
Macchiavelli, Marco; Brancati, Emanuele (2015-08-13)
The recent Global Games literature makes important predictions on how financial crises unfold. We test the empirical relevance of these theories by analyzing how dispersed information affects banks' default risk. We find evidence that precise information acts as a coordination device which reduces creditors' willingness to roll over debt to a bank, thus increasing both its default risk and its vulnerability to changes in expectations. We establish two new results. First, given an unfavorable median forecast, less dispersed beliefs greatly increase default risk; this is consistent with ...
Finance and Economics Discussion Series , Paper 2015-79

Working Paper
Set it and Forget it? Financing Retirement in an Age of Defaults
Goodman, Lucas; Mukherjee, Anita; Ramnath, Shanthi (2022-10-19)
Retirement savings abandonment is a rising concern connected to defined contribution systems and default enrollment. We use tax data on Individual RetirementAccounts (IRAs) to establish that for a recent cohort, 0.4% of retirement-age individuals abandoned an aggregate of $66 million, proxied by a failure to claim over ten years after a legal requirement to do so. Analysis of state unclaimed property databases suggests that workplace defined contribution plans are abandoned at a higher rate than IRAs. Finally, regression discontinuity estimates show that certain accounts created by default ...
Working Paper Series , Paper WP 2022-50

Working Paper
Relative Price Dispersion: Evidence and Theory
Menzio, Guido; Rudanko, Leena; Kaplan, Greg; Trachter, Nicholas (2016-01-15)
We use a large dataset on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers? attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to ...
Working Paper , Paper 16-2

Working Paper
Goods-Market Frictions and International Trade
McCallum, Andrew H.; Krolikowski, Pawel (2017-05-23)
We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time consuming and expensive for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of ...
International Finance Discussion Papers , Paper 1207

Working Paper
Bargaining Under Liquidity Constraints: Nash vs. Kalai in the Laboratory
Duffy, John; Lebeau, Lucie; Puzzello, Daniela (2021-11-10)
We report on an experiment in which buyers and sellers engage in semi-structured bargaining in two dimensions: how much of a good the seller will produce and how much money the buyer will offer the seller in exchange. Our aim is to evaluate the empirical relevance of two axiomatic bargaining solutions, the generalized Nash bargaining solution and Kalai's proportional bargaining solution. These bargaining solutions predict different outcomes when buyers are constrained in their money holdings. We first use the case when the buyer is not liquidity constrained to estimate the bargaining power ...
Working Papers , Paper 2113

Working Paper
Lending Relationships and Optimal Monetary Policy
Bethune, Zachary; Rocheteau, Guillaume; Wong, Russell; Zhang, Cathy (2020-09-25)
We construct and calibrate a monetary model of corporate finance with endogenous formation of lending relationships. The equilibrium features money demands by firms that depend on their access to credit and a pecking order of financing means. We describe the mechanism through which monetary policy affects the creation of relationships and firms' incentives to use internal or external finance. We study optimal monetary policy following an unanticipated destruction of relationships under different commitment assumptions. The Ramsey solution uses forward guidance to expedite creation of new ...
Working Paper , Paper 20-13

Working Paper
Scarred Consumption
Malmendier, Ulrike; Shen, Leslie Sheng (2019-10-09)
We show that prior lifetime experiences can "scar" consumers. Consumers who have lived through times of high unemployment exhibit persistent pessimism about their future financial situation and spend significantly less, controlling for the standard life-cycle consumption factors, even though their actual future income is uncorrelated with past experiences. Due to their experience-induced frugality, scarred consumers build up more wealth. We use a stochastic lifecycle model to show that the negative relationship between past experiences and consumption cannot be generated by financial ...
International Finance Discussion Papers , Paper 1259

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