Abstract

Men who score high on standardized IQ tests display forecast errors for inflation that are 50% lower than forecast errors for other men in a representative sample of Finnish households. High-IQ men, but not others, have consistent in inflation expectations over time and their in inflation perceptions align with past expectations. Only high-IQ men increase their consumption propensity when expecting higher inflation in line with the consumption Euler equation. High-IQ men are also twice as sensitive to interest-rate changes when making borrowing decisions. Heterogeneity in education, income, or financial constraints do not explain these results. Limited cognitive abilities are thus human frictions to the transmission and effectiveness of economic policy and inform research on heterogeneous agents in macroeconomics and  finance.