Working Paper: NBER ID: w29279
Authors: Francesco Dacunto; Daniel Hoang; Maritta Paloviita; Michael Weber
Abstract: Many consumers below the top of the distribution of a representative population by cognitive abilities barely react to monetary and fiscal policies that aim to stimulate consumption and borrowing, even when they are financially unconstrained and despite substantial debt capacity. Differences in income, formal education levels, economic expectations, and a large set of registry-based demographics do not explain these facts. Heterogeneous cognitive abilities thus act as human frictions in the transmission of economic policies that operate through the household sector and might imply redistribution from low- to high-cognitive-ability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.
Keywords: Cognitive abilities; Economic policies; Fiscal policy; Monetary policy; Human frictions
JEL Codes: D12; D84; D91; E21; E31; E32; E52; E65; E70; E71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cognitive abilities (D91) | Policy responsiveness (D78) |
| Cognitive abilities (D91) | Uptake of cash-for-clunkers program (H81) |
| Cognitive abilities (D91) | Borrowing behavior (G51) |
| Fiscal policies (H30) | Consumption response (D12) |
| Cognitive abilities (D91) | Effectiveness of economic policies (F68) |
| Cognitive abilities (D91) | Human frictions (J81) |