Department of Finance and Banking

New Paper: D'Acunto, Hoang, Paloviita, Weber (2019) - Cognitive Abilities and Inflation Expectations

  • Author:

    Francesco D'Acunto (Boston College)

    Daniel Hoang (KIT)

    Maritta Paloviita (Bank of Finland)

    Michael Weber (University of Chicago)

  • Source:

    American Economic Review (forthcoming)

  • Date: 23.01.2019

Abstract

We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. High-IQ men, but not others, have consistent inflation expectations and perceptions over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consumer when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking – they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and occupations, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.