Human Frictions to the Transmission of Economic Policy

Francesco D'Acunto, Daniel Hoang, Maritta Paloviita and Michael Weber
Additional contact information
Francesco D'Acunto: Boston College
Daniel Hoang: Karlsruhe Institute of Technology
Maritta Paloviita: Bank of Finland

No 339, 2019 Meeting Papers from Society for Economic Dynamics

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.

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 (20)

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Related works:
Working Paper: Human frictions in the transmission of economic policy (2021)
Working Paper: Human frictions in the transmission of economic policy (2019)
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