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Human frictions in the transmission of economic policy

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  • D'Acunto, Francesco
  • Hoang, Daniel
  • Paloviita, Maritta
  • Weber, Michael

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-cognitiveability agents. We conclude by discussing how our findings inform the microfoundation of behavioral macroeconomic theory.

Suggested Citation

  • D'Acunto, Francesco & Hoang, Daniel & Paloviita, Maritta & Weber, Michael, 2021. "Human frictions in the transmission of economic policy," Bank of Finland Research Discussion Papers 12/2021, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2021_012
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    4. Becker, Christoph & Dürsch, Peter & Eife, Thomas A. & Glas, Alexander, 2023. "Households' probabilistic inflation expectations in high-inflation regimes," FAU Discussion Papers in Economics 01/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    5. Davig, Troy & Foerster, Andrew, 2023. "Communicating Monetary Policy Rules," European Economic Review, Elsevier, vol. 151(C).
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    9. Barrios, John M. & Hochberg, Yael V., 2021. "Risk perceptions and politics: Evidence from the COVID-19 pandemic," Journal of Financial Economics, Elsevier, vol. 142(2), pages 862-879.
    10. Conrad, Christian & Enders, Zeno & Glas, Alexander, 2022. "The role of information and experience for households’ inflation expectations," European Economic Review, Elsevier, vol. 143(C).
    11. Becker, Christoph & Dürsch, Peter & Eife, Thomas A. & Glas, Alexander, 2023. "Households' probabilistic inflation expectations in high-inflation regimes," FAU Discussion Papers in Economics 01/2023, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
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    More about this item

    Keywords

    Cognition; Behavioral Macroeconomics; Heterogeneous Agents; Fiscal and Monetary Policy; Beliefs; Redistribution; Inequality; Survey Data; Household Finance;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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