Jiri Slacalek, 05 December 2019

Many economic models assume that households have up-to-date information. This column relaxes this assumption to see how this affects consumption at the household and aggregate level. A model that assumes that households only occasionally update their information about macroeconomic quantities better fits the micro and macro data, and can explain the fact that consumption reacts little to the announcement of a fiscal stimulus but substantially to the actual receipt of a stimulus payment.

Harjoat Singh Bhamra, Raman Uppal, 18 October 2018

Most households do not diversify but instead invest in only a handful of stocks, typically ones with which they are familiar. Using a new framework for evaluating the welfare losses from this underdiversification, this column argues that when the effect of familiarity biases on a household’s decision to allocate wealth between risky and safe assets and on its consumption-savings decisions are taken into account, the welfare loss is amplified by a factor of four. The impact on household and social welfare of financial policies through innovation, education, and regulation could thus be substantial.

CEPR Policy Research