Working Paper: NBER ID: w24545
Authors: Georgemarios Angeletos; Zhen Huo
Abstract: We develop an equivalence between the equilibrium effects of incomplete information and those of two behavioral distortions: myopia, or extra discounting of the future; and anchoring of current behavior to past behavior, as in models with habit persistence or adjustment costs. We show how these distortions depend on higher-order beliefs and GE mechanisms, and how they can be disciplined by evidence on expectations. We finally illustrate the use of our toolbox with a quantitative application in the context of inflation, a bridge to the HANK literature, and an extension to networks.
Keywords: informational frictions; myopia; anchoring; general equilibrium mechanisms; macroeconomic policy
JEL Codes: D83; D84; E03; E10; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informational frictions (D89) | myopia (E71) |
| informational frictions (D89) | anchoring (Y60) |
| myopia (E71) | underestimation of future aggregate income changes (E24) |
| myopia (E71) | sluggish adjustments in aggregate spending (E12) |
| anchoring (Y60) | sluggish adjustments in aggregate spending (E12) |
| informational frictions (D89) | inflation (E31) |
| degree of market concentration (L13) | inflation persistence (E31) |
| conduct of monetary policy (E52) | inflation persistence (E31) |
| myopia (E71) | inflation persistence (E31) |
| anchoring (Y60) | inflation persistence (E31) |