Essays in Macroeconomics

Abstract

This dissertation studies how household expectations and portfolio frictions impact the consumption savings decision. In Chapter 1, I study how long-run beliefs shape intertemporal choice. Conventional DSGE models often use the assumption that agents have rational expectations when making intertemporal choices that is based on an expected path that extends into the infinite future. However, empirical evidence suggests that long run expectations can often deviate from this assumed path. I first document new patterns in the Survey of Professional Forecasters that is consistent with forecasters differing in their forecasting approach depending on the horizon. I then modify Woodford (2018) to show how a new type of bounded rationality, finite horizon planning, can match this behavior by allowing for differing expectations formation over the short and long run. When applied to a standard real business cycle model, I show that by varying how long run expectations are formed, this can lead to diverging patterns in the amplification and persistence of output and, under certain assumptions, generate both excess consumption and investment volatility over the business cycle. In Chapter 2, I then study the household’s consumption-savings problem in the presence of two risk free assets. Households can save in bonds, which are subject to a fixed participation cost, or deposits which pay a lower return. Optimal decision rules lead to the household’s consumption being higher relative to the frictionless single asset case, as the future value of marginal consumption becomes discounted when the household chooses to save in deposits. I then study the stationary equilibrium when households face only idiosyncratic risk. When I calibrate the model to generate 56% of savers in the economy to be depositors, I find that the distribution of consumption becomes bimodal. Since depositors prefer higher consumption, this shifts the average consumption of savers in the distribution to the right. In Chapter 3, I build on the findings in the previous chapter and examine the impact of fiscal and monetary policy in a New Keynesian model with monopolistic competition in the deposit market and bond participation costs. With these frictions, changes to government spending will have real effects on output as Ricardian Equivalence no longer holds and households cannot perfectly consumption smooth in either risk-free asset. However, they do not alter the response of real variables to monetary policy shocks relative to the frictionless case in the baseline setting. When I recalibrate the model to target the observed patterns of high deposit spreads and high portfolio concentration in deposits following the COVID-19 pandemic, I find that these new initial conditions do dampen the impact of monetary policy shocks. I then test empirically whether this prediction holds using county variation in excess deposits and find that counties that amassed high excess deposits prior to the start of monetary tightening in 2021 had relatively higher consumption growth during the tightening period.