I am an Assistant Professor in Economics at the Institute for International Economic Studies, Stockholm University. My research seeks to combine information economics with macroeconomics and finance. I am especially interested in the macroeconomic consequences of information frictions.
A Rational Theory of Caution
with D. Robertson
This paper develops a rational theory of caution, in which cautious expectations arise as a rational response to uncertainty about the best use of limited information. To do so, we impose the constraint that people have to estimate the optimal use of their information in an otherwise standard class of linear dynamic economies. The resulting theory has many similarities to rational models of limited attention. However, our theory is crucially consistent with the broad-based predictability of forecast errors and history-dependent choices that have otherwise called into question attention-based models of expectation formation. We conclude with a series of applications that show how our results lead to new economic insights about the efficacy of monetary policy, the marginal propensity to consume from transfers, and the responsiveness asset prices, among others
with T. Broer
Professional forecasts are often used to gauge household and firm expectations. Recently, the average of such forecasts have been argued to support rational expectation formation with noisy private information. We document that individual forecasts of US GDP and inflation in the Survey of Professional Forecasters overrespond to both private and public information, contradicting, prima facie, the assumption of noisy rational expectation formation. We generalize two alternative models of forecaster behavior that focus on strategic diversification and behavioral overconfidence, respectively, to dynamic environments with noisy private information. We find that both models predict overresponses, but only the overconfidence model is simultaneously consistent with a substantial overreaction to public information.
Information and Wealth Heterogeneity in the Macroeconomy
Motivated by the systematic differences in macroeconomic expectations across US households and the complexity of rational-expectations equilibria when the state of the economy is highly dimensional, we study optimal information choice in neoclassical economies with heterogeneous agents and incomplete markets. Incentives to acquire information about the current state of the economy differ strongly by wealth level and employment status. Because some households lose very little from uninformed choices, standard rational expectations equilibria are typically not robust to small costs of information. When we include optimal dynamic information choice in a standard quantitative economy with unemployment risk and incomplete markets (Krusell and Smith, 1998), we find expectational patterns similar to those observed in US micro data. Both wealth inequality and business cycle volatility are substantially larger than with full information. Moreover, policies have an additional transmission channel through their effect on information choice. For example, a wealth tax decreases information acquisition and increases both aggregate volatility and inequality.
The Informativeness of Prices
This paper analyzes how higher-order expectations affect the informativeness of asset prices in a setting with dispersed asymmetric information and a non-atomistic player type. I show that higher-order expectations create a novel trade-off between people's knowledge about the driving forces of the economy and people's knowledge about the beliefs of others. Because of this trade-off, markets one would think should be close to "informational efficiency" -- those with many agents with precise private information -- may be further away than previously thought. I demonstrate that more agents and more precise private information can decrease welfare for all market partcipants by increasing uncertainty about future prices -- even for the agents who receive superior private information. To illustrate these effects, I develop a flexible solution technique for linear dynamic rational expectations models with dispersed asymmetric information and type-specific shocks affecting an endogenous variable.
US Monetary Policy & Uncertainty: Testing Brainard's Hypothesis
This paper presents an empirical analysis of the impact of time-varying economic uncertainty on US monetary policy activism. I use a latent factor based measure, extracted from a set of five different variables, to proxy economic uncertainty. Monetary policy activism is inferred from a time-varying Taylor Rule estimated using a structural VAR allowing for stochastic volatility. Contrary to Brainard's Principle, the results point to a substantial Hansen and Sargent type reaction: monetary policy activism increases significantly in response to an increase in economic uncertainty. The estimates, moreover, indicate that both inflation and unemployment activism respond roughly equally to changes in aggregate uncertainty.
Forthcoming American Economic Review
with A. Walther
We document simultaneous over- and under-responses to new information by households, firms, and professional forecasters in survey data. Such behavior is inconsistent with existing theories based on either behavioral bias or rational inattention. We develop a structural model of information choice in which people base expectations on observables that can reconcile the seemingly contradictory facts. We show that optimally-chosen, asymmetric attention to different observables can explain the co- existence of over- and under-responses. We then embed our model of information choice into a microfounded macroeconomic model, which generates expectations consistent with the survey data. We demonstrate that our model creates over-optimistic consumption beliefs in booms and predictability in consumption changes.
Learning by Sharing
Forthcoming AEJ: Macroeconomics
The past two decades have seen a considerable increase in the amount of public information provided by policy makers. This paper proposes a novel rationale against such disclosure. Unlike other providers of public information, a policy maker can condition a policy instrument, such as a tax or an interest rate, on his information. This option allows the policy maker to control the influence of his information on market outcomes without the added obfuscation associated with partial disclosure. As a result, the exclusive use of a policy instrument is preferable in simple models in which externalities render full disclosure suboptimal. I show how this rationale extends from an abstract game to a micro-founded macroeconomic model in which firms learn from market prices.
A common view states that central bank releases can decrease a central bank’s own information about the economy and can be harmful if about inefficient disturbances, such as cost-push shocks. This paper shows how neither is the case in a micro-founded macroeconomic model in which households and firms learn from central bank releases and the central bank from the distribution of firm prices. Central bank releases make private sector and central bank expectations closer to common knowledge. This helps transmit dispersed information between the private sector and the central bank. As a result, the release of additional information can decrease the central bank’s own uncertainty and be beneficial, irrespective of the efficacy of macroeconomic fluctuations. A calibrated example suggests that the associated welfare benefits can be substantial.
An Informational Rationale for Action over Disclosure
Journal of Economic Theory, 2020
Work in Progress
Safety is Paramount: On the Demand for Safe Assets
with S. Boserup, A. Walther, and S. Walther
Quantifying Imperfect Information
with D. Robertson