Essays in Macroeconomics and Finance

Abstract

This dissertation investigates how households acquire information, form expectations, and make financial decisions in the presence of limited attention and reasoning. The first chapter documents selective inattention to interest rates. A combination of existing and newly-designed surveys shows that households close to durables purchases actively acquire more information about interest rates and have more accurate expectations. These empirical findings motivate a heterogeneous-agent model with endogenous attention to interest rates. Selective inattention shifts the composition of spending responses to interest rate cuts, accelerates the impact of larger cuts, and generates dampened responses to changes in volatility that are closer to empirical evidence. The second chapter introduces a theory of shallow thinking, where agents reason through only a limited number of steps in the causal structure of the economy. New survey data show that households mentally process just 2.6 steps of economic propagation on average. When incorporated into New Keynesian and real business cycle models, shallow thinking accounts for several empirical puzzles, including the asymmetric response of long-term interest rates to different shocks, the predictive power of inflation expectations for bond returns, and persistent output responses to productivity shocks. The third chapter studies how and why households adjust their consumption, saving, and borrowing in response to transitory income shocks. Drawing on new large-scale survey data, the chapter quantifies intertemporal marginal propensities to consume and deleverage and finds significant heterogeneity across households. Standard socioeconomic characteristics explain only a fraction of this variation; psychological factors, past experiences, and expectations improve explanatory power substantially. A machine learning approach identifies four behavioral types, highlighting that similar financial decisions often arise from fundamentally different motivations.