Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/295169 
Year of Publication: 
2024
Series/Report no.: 
DIW Discussion Papers No. 2080
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
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.
Subjects: 
Household Heterogeneity
Cognitive Skills
Overconfidence
Financial Constraints
Fiscal Policy
HANK
JEL: 
D91
E21
E62
E71
G51
Document Type: 
Working Paper

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