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Working Paper
A Behavioral Foundation for the Investment Wedge
Motivated by behavioral evidence, we develop a tractable method for incorporating competition neglect in a general equilibrium firm investment problem. Competition neglect causes firms to systematically underestimate the investment of their competitors. When we introduce competition neglect into a canonical RBC model, this friction acts like an investment wedge that causes overinvestment at first, and underinvestment later on. In contrast to a model with exogenous investment shocks, these dynamics are accompanied by realistic variation in equity premia, even in the absence of financial ...
Working Paper
Attention-Dependent Monetary Transmission to Household Beliefs
When do households listen to the Fed? We show the answer lies in a simple but powerful force: household attention to macroeconomic conditions. We develop a model where attention acts as a crucial gatekeeper for the pass-through of policy news to beliefs, and confirm its predictions using household survey data. We find that belief revisions to monetary policy surprises are concentrated among attentive individuals—particularly those with high financial stakes—and this effect strengthens dramatically during uncertain times. This implies the expectations channel is most potent when it matters ...
Working Paper
Behavioral Economics and Macroeconomic Models
Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy--for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model--specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the ...