Persistent Overconfidence and Biased Memory: Evidence from Managers

By David Huffman, Collin Raymond, and Julia Shvets

American Economic Review, October 2022

A long-standing puzzle is how overconfidence can persist in settings characterized by repeated feedback. This paper studies managers who participate repeatedly in a high-powered tournament incentive system, learning relative performance each time. Using r...

Reference Dependence in the Housing Market

By Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx, and Tarun Ramadorai

American Economic Review, October 2022

We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric mo...

Fake News, Voter Overconfidence, and the Quality of Democratic Choice

By Melis Kartal and Jean-Robert Tyran

American Economic Review, October 2022

This paper studies, theoretically and experimentally, the effects of overconfidence and fake news on information aggregation and the quality of democratic choice in a common-interest setting. We theoretically show that overconfidence exacerbates the adver...

Credit, Attention, and Externalities in the Adoption of Energy Efficient Technologies by Low-Income Households

By Susanna B. Berkouwer and Joshua T. Dean

American Economic Review, October 2022

We study an energy efficient charcoal cookstove in an experiment with 1,000 households in Nairobi. We estimate a 39 percent reduction in charcoal spending, which matches engineering estimates, generating a 295 percent annual return. Despite fuel savings o...

Demagogues and the Economic Fragility of Democracies

By Dan Bernhardt, Stefan Krasa, and Mehdi Shadmehr

American Economic Review, October 2022

We investigate the susceptibility of democracies to demagogues, studying tensions between representatives who guard voters' long-run interests and demagogues who cater to voters' short-run desires. Parties propose consumption and investment. Voters base c...

Posterior Separable Cost of Information

By Tommaso Denti

American Economic Review, October 2022

We provide testable conditions under which the cost of acquiring information is given by the expected reduction of a measure of uncertainty (e.g., entropy). The assumption, under the name of posterior separability, is nearly universal in the literature of...

Valid t-Ratio Inference for IV

By David S. Lee, Justin McCrary, Marcelo J. Moreira, and Jack Porter

American Economic Review, October 2022

In the single-IV model, researchers commonly rely on t-ratio-based inference, even though the literature has quantified its potentially severe large-sample distortions. Building on Stock and Yogo (2005), we introduce the tF critical valu...

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Front Matter

American Economic Journal: Macroeconomics, October 2022

News Shocks under Financial Frictions

By Christoph Görtz, John D. Tsoukalas, and Francesco Zanetti

American Economic Journal: Macroeconomics, October 2022

We examine the dynamic effects of TFP news shocks in the context of frictions in financial markets. We document two new facts. First, a shock to future TFP generates a significant decline in credit spread indicators along with a robust improvement in cred...

Fiscal Rules and the Sovereign Default Premium

By Juan Carlos Hatchondo, Leonardo Martinez, and Francisco Roch

American Economic Journal: Macroeconomics, October 2022

We study fiscal rules using a sovereign default model. A debt-brake (spread-brake) rule imposes a ceiling on the fiscal deficit when the sovereign debt (spread) is above a threshold. For our benchmark calibration, similar gains can be achieved with the op...

Optimal Public Debt with Life Cycle Motives

By William B. Peterman and Erick Sager

American Economic Journal: Macroeconomics, October 2022

This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is o...

Learning on the Job and the Cost of Business Cycles

By Karl Walentin and Andreas Westermark

American Economic Journal: Macroeconomics, October 2022

We show that business cycles reduce welfare through a decrease in the average level of employment in a labor market search model with learning on the job and skill loss during unemployment. Empirically, unemployment and the job-finding rate are negatively...

Asymmetric Effects of Monetary Policy in Regional Housing Markets

By Knut Are Aastveit and André K. Anundsen

American Economic Journal: Macroeconomics, October 2022

The responsiveness of house prices to monetary policy shocks depends on the nature of the shock—expansionary versus contractionary—and on local housing supply elasticities. These findings are established using a panel of 263 US metropolitan areas. Exp...

Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy

By Taisuke Nakata and Sebastian Schmidt

American Economic Journal: Macroeconomics, October 2022

We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven liquidity traps are not a...

Age Structure and the Impact of Monetary Policy

By John V. Leahy and Aditi Thapar

American Economic Journal: Macroeconomics, October 2022

We exploit cross-sectional variation in the response of US states to an identified monetary policy shock to study how the impact of monetary policy varies with the age structure of the population. We find that the economy's response is weaker the greater ...

Distortions and the Structure of the World Economy

By Lorenzo Caliendo, Fernando Parro, and Aleh Tsyvinski

American Economic Journal: Macroeconomics, October 2022

We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world's input-output structure and world's GDP change due to changes in frictions. We derive a sufficient statistic to identify fricti...

Mind the Gap! Stylized Dynamic Facts and Structural Models

By Fabio Canova and Filippo Ferroni

American Economic Journal: Macroeconomics, October 2022

We study what happens to identified shocks and to dynamic responses when the data generating process features q disturbances but q1 < q variables are used in an empirical model. Identified shocks are linear ...