PARALYZED BY FEAR Ilut, Cosmin; Valchev, Rosen; Vincent, Nicolas
Econometrica,
September 2020, Letnik:
88, Številka:
5
Journal Article
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We propose a new theory of price rigidity based on firms’ Knightian uncertainty about their competitive environment. This uncertainty has two key implications. First, firms learn about the shape of ...their demand function from past observations of quantities sold. This learning gives rise to kinks in the expected profit function at previously observed prices, making those prices both sticky and more likely to reoccur. Second, uncertainty about the relationship between aggregate and industry-level inflation generates nominal rigidity. We prove the main insights analytically and quantify the effects of our mechanism. Our estimated quantitative model is consistent with a wide range of micro-level pricing facts that are typically challenging to match jointly. It also implies significantly more persistent monetary non-neutrality than in standard models, allowing it to generate large real effects from nominal shocks.
This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalizes both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer ...horizons. In the model, excess currency returns arise as compensation for endogenous fluctuations in bond convenience yield differentials. Due to the interaction of monetary and fiscal policy, the impulse response of the equilibrium convenience yield is nonmonotonic, which generates the reversal of the puzzle. The calibrated model fits exchange rate dynamics very well. I also find direct evidence linking convenience yields to excess currency returns.
Abstract
We develop a novel bounded rationality model of imperfect reasoning as the interaction between automatic (System 1) and analytical (System 2) thinking. In doing so, we formalize the ...empirical consensus of cognitive psychology using a structural, constrained-optimal economic framework of mental information acquisition about the unknown optimal policy function. A key result is that agents reason less (more) when facing usual (unusual) states of the world, producing state- and history-dependent behavior. Our application is an otherwise standard incomplete-markets model with no a priori behavioral biases. The ergodic distribution of actions and beliefs is characterized by endogenous learning traps, where locally stable state dynamics generate familiar regions of the state space within which behavior appears to follow memory-based heuristics. This results in endogenous behavioral biases that have many empirically desirable properties: the marginal propensity to consume is high even for unconstrained agents, hand-to-mouth status is more frequent and persistent, and there is more wealth inequality than in the standard model.
Abstract
We propose a model in which the emergence of a single dominant currency is driven by the need to finance international trade. The model generates multiple stable steady states, each ...characterized by a different dominant asset, consistent with the historical durability of real-world currency regimes. The persistence of regimes is caused by a positive interaction between the returns to saving in an asset and the use of that asset for financing trade. A calibrated version of the model shows that the welfare gains of dominance are substantial, but accrue primarily during the transition to dominance. We perform several counterfactual experiments to assess potential threats to the dollar’s continued dominance.
Abstract
We show that international portfolios reflect the underlying heterogeneity in investors’ beliefs. Using data on the foreign sovereign debt holdings of European banks matched with their ...forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model in which partial information specialization arises endogenously by introducing a degree of unlearnable uncertainty about asset payoffs.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
We develop a novel framework of bounded rationality under cognitive frictions that studies learning over optimal behavior through both deliberative reasoning and accumulated experiences. Using both ...types of information, agents engage in Bayesian non-parametric estimation of the unknown action value function. Reasoning signals are produced internally through mental deliberation, subject to a cognitive cost. Experience signals are the observed utility outcomes at previous actions. Agents' subjective estimation uncertainty, which evolves through information accumulation, modulates the two modes of learning in a state- and history-dependent way. We discuss how the model draws on and bridges conceptual, methodological and empirical insights from both economics and the cognitive sciences literature on reinforcement learning.
We live in a time when communication technologies are already a part of our daily lives. The technological aspect of education has always been defining in the preparation of students in primary ...school and high school, especially in the XXI century. In the last few years, and in particular during the COVID pandemic, information technology has been the main tool for teaching, conducting discussions on various topics and issues, conducting tests and examinations, and communication between the main beneficiaries: teachers, students and their parents. Many multi-platform applications have been created, making access to electronic resources on the web much easier. The variety of learning materials can be viewed on any device: computer, laptop, tablet or smartphone. Educational institutions have managed to adequately and timely adapt to e-learning by changing and adapting traditional school teaching. The software business invests significant funds and resources in the development of communication technologies for educational purposes, due to which students were able to be sufficiently prepare for their school subjects. This was proven by all the exams and competitions, which were successfully conducted in this extraordinary epidemiological situation.
This dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and ...the surprising lack of correlation between terms of trade shocks and output in small open economies. The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism. In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information. In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.
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