Macroeconomics and Individual Decisionmaking.

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As part of the NBER's Project on Behavioral Macroeconomics, there was a meeting on "Macroeconomics and Individual Decisionmaking" in Cambridge on November 18. Project Directors George A. Akerlof, University of California, Berkeley, and Robert J. Shiller, NBER and Yale University, set the following agenda:

Xavier Gabaix, MIT, and David I. Laibson, NBER and Harvard University, "The 6D Bias and the Equity Premium Puzzle"

Discussant: Karen E. Dynan, Federal Reserve Board of Governors

George A. Akerlof, and William T. Dickens and George L. Perry, Brookings Institution, "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve"

Discussant: Robert J. Shimer, NBER and Princeton University

Steven N. Durlauf, NBER and University of Wisconsin, "A Framework for the Study of Individual Behavior and Social Interactions"

Discussant: Russell W. Cooper, NBER and Boston University

Roland J. Benabou, NBER and Princeton University, and Jean Tirole, Universite des Sciences Sociales, Toulouse, "Willpower and Personal Rules"

Discussant: Botond Koszegi, University of California, Berkeley

Sendhil Mullainathan, NBER and MIT, "Thinking through Categories: A Model of Cognition"

Discussant: Edward D. O'Donoghue, Cornell University

David E. Lebow, Raven E. Saks, and Beth Anne Wilson, Federal Reserve Board of Governors, "Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index"

Discussant: Shulamit Kahn, Boston University

If decision costs lead agents to up date consumption only every D periods, then high-frequency data will exhibit an unusually low correlation between equity returns and consumption growth. Gabaix and Laibson characterize the dynamic properties of an economy composed of consumers who delay updating in this way. Using a Mehra-Prescott procedure, an econometrician would infer a coefficient of relative risk aversion biased upward by a factor of 6D. With quarterly data, if agents adjust their consumption every D = 4 quarters, the imputed coefficient of relative risk aversion will be 24 times greater than the true value. High levels of risk aversion implied by the equity premium and violations of the Hansen-Jaganathan bounds cease to be puzzles. The neoclassical model with delayed adjustment explains the consumption behavior of shareholders. Once limited participation is taken into account, the model matches the high-frequency properties of aggregate consumption and equity returns.

In their paper, Akerlof, Dickens, and Perry question the basic assumptions...

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