Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/191552
Authors: 
D'Acunto, Francesco
Hoang, Daniel
Paloviita, Maritta
Weber, Michael
Year of Publication: 
2019
Series/Report no.: 
KIT Working Paper Series in Economics 128
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.
Subjects: 
Macroeconomic Beliefs
Limited Cognition
Heterogeneous Agents
Fiscal and Monetary Policy
Survey Data
Household Finance
JEL: 
D12
D84
D91
E21
E31
E32
E52
E65
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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