Intertemporal preferences are difficult to measure We estimate time preferences using a structural buffer stock consumption model and the Method of Simulated Moments The model includes stochastic labor income, liquidity constraints, child and adult dependents, liquid and illiquid assets, revolving credit, retirement, and discount functions that allow short-run and long-run discount rates to differ Data on retirement wealth accumulation, credit card borrowing, and consumption-income comovement identify the model Our benchmark estimates imply a 40% short-term annualized discount rate and a 43% long-term annualized discount rate Almost all specifications reject the restriction to a constant discount rate Our quantitative results are sensitive to assumptions about the return on illiquid assets and the coefficient of relative risk aversion When we jointly estimate the coefficient of relative risk aversion and the discount function, the short-term discount rate is 15% and the long-term discount rate is 38%

/pdf/estimating-discount-functions-with-consumption-choices-over-38xzss9y37.pdf

Estimating Discount Functions with Consumption Choices over the Lifecycle

We study the behavior of credit and output across a financial crisis cycle using in- formation from credit spreads and credit growth. We show the transition into a crisis occurs with a large increase in credit spreads, indicating that crises involve a dramatic shift in expectations and are a surprise. The severity of the subsequent crisis can be forecast by the size of credit losses (change in spreads) coupled with the fragility of the financial sector (as measured by pre-crisis credit growth), and we document that this interaction is an important feature of crises. We also find that recessions in the aftermath of financial crises are severe and protracted. Finally, we find that spreads fall pre-crisis and appear too low, even as credit grows ahead of a crisis. This behavior of both prices and quantities suggests that credit supply expansions are a precursor to crises. The 2008 financial crisis cycle is in keeping with these historical patterns surrounding financial crises.

/pdf/how-credit-cycles-across-a-financial-crisis-4muc0xq54f.pdf

How Credit Cycles across a Financial Crisis

Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

/pdf/predictable-financial-crises-2vbl7e64na.pdf

Predictable Financial Crises

The aim of this study was to investigate whether recognised barriers to learning still exist for mature adult learners in a higher education (HE) centre within a further education (FE) college. Eighty‐four students who attend the further education college were asked to complete a questionnaire and participate in follow‐up semi‐structured interviews. The results identified that the impact of potential barriers is minimised by the approach adopted in the HE centre of the FE college in this study. The traditional barriers of accessibility of the institution, finance and family commitments did not seem to be an issue for these students. Contact with students early in the process seems to allay many of the fears about returning to study, particularly at HE level. This initial contact forms the basis of the support mechanisms that are laid down for each student throughout the course of their choice. This approach is a model designed for the particular FE institution described in this study.

Barriers to learning for mature students studying HE in an FE college

We present the case for the centrality of overreaction in expectations for addressing important challenges in finance and macroeconomics. First, non-rational expectations by market participants can be measured and modeled in ways that address some of the key challenges posed by the rational expectations revolution, most importantly the idea that economic agents are forward-looking. Second, belief overreaction can account for many long-standing empirical puzzles in macro and finance, which emphasize the extreme volatility and boom-bust dynamics of key time series, such as stock prices, credit, and investment. Third, overreaction relies on psychology and is disciplined by survey data on expectations. This suggests that relaxing the assumption of rational expectations is a promising strategy, helps theory and evidence go together, and promises a unified view of a great deal of data.

https://www.aeaweb.org/articles/pdf/doi/10.1257/jep.36.3.223

Overreaction and Diagnostic Expectations in Macroeconomics


 This paper incorporates diagnostic expectations into a general equilibrium macroeconomic model with a financial intermediary sector. Diagnostic expectations are a forward-looking model of extrapolative expectations that overreact to recent news. Frictions in financial intermediation produce nonlinear spikes in risk premia and slumps in investment during periods of financial distress. The interaction of sentiment with financial frictions generates a short-run amplification e↵ect followed by a long-run reversal effect, termed the feedback from behavioral frictions to financial frictions. The model features sentiment-driven financial crises characterized by low pre-crisis risk premia and neglected risk. The conflicting short-run and long-run effect of sentiment produces boom-bust investment cycles. The model also identifies a stabilizing role for diagnostic expectations. Under the baseline calibration, financial crises are less likely to occur when expectations are diagnostic than when they are rational.

A Macro-Finance Model with Sentiment

This book looks at the barriers that prevent people from learning and offers an overview of the three main categories of barriers: cultural, structural and personal. The aim of the book is to help its readers understand the barriers that prevent learning and is targeted at anyone interested in promoting learning, from colleges and policy makers to practitioners.

Understanding barriers to learning: a guide to research and current thinking


 We estimate β-δ time preferences and relative risk aversion (RRA) using a lifecycle model including stochastic income, liquid and illiquid assets, credit cards, dependents, Social Security, mortality, and bequests. Preference parameters are identified by cross-tabulating four lifecycle age intervals and four balance sheet moments: the share of households carrying (ie, revolving) credit card debt, average carried credit card debt, average net wealth among households carrying credit card debt, and average net wealth among households not carrying credit card debt. The 16 moments are approximately matched by (MSM) parameter estimates β=0.53, δ=0.99, and RRA=1.9. (JEL D91, E21, G51)

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A Macro-Finance Model with Sentiment

Understanding barriers to learning: a guide to research and current thinking

Estimating Discount Functions with Consumption Choices over the Lifecycle

The Beta-Delta-DELTA Sweet Spot