(Ir)razionalità e informazioni imperfette

DAF - Liceo Frisi (Monza), 28 Aprile 2022

Chi sono?

Student @ UniBocconi & fellow of Tortuga

Research interests:

  • Macro (monetary and incomplete info)
  • Inequalities
  • Education and Human Capital

This presentation…

  • is not an economic lecture
  • we will jump from concept to (unrelated) concept
  • a variety of stuff is presented without deepening in anything particular

Economics

  • Why some countries are poor and someothers are rich?
  • What drives business cycles?
  • What is the role of policy (fiscal, monetary and structural) if any?

We identify a long and a short run.

Italy

Irrationality?

Can we explain crisis using irrationality?

Irrationality can explain everything, hence nothing

Rationality, why?

We need models and we need assumptions

  • descriptive: as it is
  • normative: as it ought be or as if…

Helicopter money

The gvt decides to give 100€ more to each citizen. What is the effect?

  • factual scenario
  • counterfactual scenario: not necessary the status quo (a crisis hit the economy)

Rationality as consistency

Rationality can be seen as consistency. It is formed by a set of axioms (representation theorem) that are sufficient to negate blantantly irrational patterns.

Consistency means that we cannot derive any proposition from a set of premises.

First axiom

Economic agents act to maximize their utility

Is this good or bad? Is this an accurate description of the process? Is this an accurate description of the outcome?

What is utility?

  • consumption of a bundle;
  • leisure;
  • values?
  • health?

Does environment matters?

Yes, it can! How?

  • Preferences over different goods: buy more bikes than cars
  • But cars are more comfortable: private vs social benefit
  • Taxes or subsidies!

What generates utility?

  • consumption is measurable, leisure too
  • values are hardly measurable unambiguously
  • link to psychology, sociology, neuroscience but still econ!

the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. (Keynes)

Values and culture

Culture is customary beliefs and values that [are] transmitted fairly unchanged from generation to generation (Guiso, Sapienza and Zingales 2006)

How to conciliate culture with EUT?

Culture can have a rule of thumb origin: as if acquiring informations and deciding is complex

  • Alesina, Giuliano and Nunn (2013)
  • Alesina, Algan, Cahuc and Giuliano (2015)

Inequalities and fairness

Ernst Fehr and Klaus Schmidt

$$U_i=x_i-\frac{\alpha_i}{N-1}\sum_{x_j\geq x_i}(x_j-xi)-\frac{\beta_i}{N-1}\sum_{x_j<x_i}(x_i-x_j)$$

  • $\alpha$ envy
  • $\beta$ altruism

Others do matter

Imagine that you have 1000€ on your bank account. With probability $\frac{1}{2}$ there is a bank run (if you withdrawn you get 1000, otherwise 0). With probability $\frac{1}{2}$ there is no bank run (if you withdrawn you get 1000, otherwise 1500).

What would you do?

Multiple equilibria and self-fulfilling prophecies (Diamond and Dybvig, 1983 and Obstfeld, 1986) It is the same with bubbles

Morris and Shin (1998) & incomplete info

Small idiosyncratic forecast errors cannot explain crisis, rather they anchor the system!

Confidence

Multiple equilibria is linked to confidence, from the latin world for trust (Akerlof and Shiller)

Is confidence even more powerfull?

Trust

Is it important only in case of multiple equilibria?

It is necessary for the functioning of markets. It builds up social capital

Can we trust announcements?

If the ECB announces that it will rise interest rate to 5% tomorrow, would it be credible? No, because agents forms expectations that are model consistent

(Rational) expectations

  • An economic agent make the best possible use of all availble information
  • Forecast errors are on average zero
  • Bob Lucas on monetary neutrality

Lucasian Phillips Curve

A decentralized economy with incomplete information can show a short run trade off between output and inflation

Sentiment driven business cycles

  • Incomplete information about aggregate productivity
  • Complementarities in production
  • Public noise shock: expansion of gdp, employment, consumption
  • Aggr. productivity shock: expansion of gdp/consumption - contraction of employment

Are expectations rational?

Maybe no. Why?

Alternatives to FIRE

  • Delayed-staggered forecast adjustment (Mankiw-Reis)
  • Diagnostic expectations (Bordalo, Gennaioli, Ma and Shleifer) Individual overreaction and consensus underreaction

Alternatives to FIRE

  • Cognitive discounting (Gabaix)

If integrated in HANK: front and not back-loaded monetary policy