Human frictions in the transmission of economic policy

Francesco D'Acunto, Daniel Hoang, Maritta Paloviita () and Michael Weber

No 128, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men - those below the top of the distribution by cognitive abilities (IQ) - do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing decisions.

Keywords: Macroeconomic Beliefs; Limited Cognition; Heterogeneous Agents; Fiscal and Monetary Policy; Survey Data; Household Finance (search for similar items in EconPapers)
JEL-codes: D12 D84 D91 E21 E31 E32 E52 E65 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mac, nep-mon and nep-neu
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Human frictions in the transmission of economic policy (2021)
Working Paper: Human Frictions to the Transmission of Economic Policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:128

DOI: 10.5445/IR/1000092484

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