Behavioral Macroeconomics via Sparse Dynamic Programming

Gabaix, Xavier

doi:10.1093/jeea/jvad057

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Behavioral Macroeconomics via Sparse Dynamic Programming

2023-10-11

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Gabaix, Xavier *

DOI：10.1093/jeea/jvad057

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Abstract

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This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or sparse, model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of some of the canonical models in macroeconomics and finance. In the life-cycle model, the agent initially does not pay much attention to retirement and undersaves; late in life, he progressively saves more, generating realistic dynamics. In the consumption-savings model, the consumer decides to pay little or no attention to the interest rate and more attention to his income. Ricardian equivalence and the Lucas critique partially fail because the consumer may not pay full attention to taxes and policy changes. In a Merton-style dynamic portfolio choice problem, the agent endogenously pays limited or no attention to the varying equity premium and hedging demand terms. Finally, in the neoclassical growth model, agents act on a simplified model of the macroeconomy; in equilibrium, fluctuations are larger and more persistent.

Keywords:

MONETARY-POLICY

INFORMATION ACQUISITION

NATURAL EXPECTATIONS

SHROUDED ATTRIBUTES

RARE DISASTERS

LONG-RUN

CONSUMPTION

INCOME

MODEL

RATIONALITY