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Bad Luck or Bad Decisions? Macroeconomic Implications of Persistent Heterogeneity in Cognitive Skills and Overconfidence

Oliver Pfäuti, Fabian Seyrich and Jonathan Zinman

No 32305, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Business cycle models often abstract from persistent household heterogeneity, despite its potentially significant implications for macroeconomic fluctuations and policy. We show empirically that the likelihood of being persistently financially constrained decreases with cognitive skills and increases with overconfidence thereon. Guided by this and other micro evidence, we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard HANK model. Overconfidence proves to be the key innovation, driving households to spend instead of precautionary save and producing empirically realistic wealth distributions and hand-to-mouth shares and MPCs across the income distribution. We highlight implications for various fiscal policies.

JEL-codes: D01 D91 E03 E2 E21 E22 E32 E62 G51 H31 H6 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-dge, nep-inv, nep-mac and nep-neu
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