Discussion Paper Details

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Title: Information and Wealth Heterogeneity in the Macroeconomy

Author(s): Tobias Broer, Alexandre Kohlhas, Kurt Mitman and Kathrin Schlafmann

Publication Date: March 2021

Keyword(s): Heterogenous information, incomplete markets, precautionary savings and unemployment

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We document systematic differences in macroeconomic expectations across U.S. households and rationalize our findings with a theory of information choice. We embed this theory into an incomplete-markets model with aggregate risk. Our model is quantitatively consistent with the pattern of expectation heterogeneity in the data. Relative to a full-information counterpart, our model implies substantially increased macroeconomic volatility and inequality. We show through the example of a wealth tax that neglecting the information channel leads to erroneous conclusions about the effects of policies. While in the model without information choice a wealth tax reduces wealth inequality, in our framework it reduces information acquired in the economy, leading to increased volatility and higher wealth inequality in equilibrium.

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Bibliographic Reference

Broer, T, Kohlhas, A, Mitman, K and Schlafmann, K. 2021. 'Information and Wealth Heterogeneity in the Macroeconomy'. London, Centre for Economic Policy Research.