NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Karthik Sastry

Department of Economics, MIT
77 Massachusetts Avenue E52-300
Cambridge, MA 02139

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Massachusetts Institute of Technology

NBER Working Papers and Publications

August 2020Imperfect Macroeconomic Expectations: Evidence and Theory
with George-Marios Angeletos, Zhen Huo
in NBER Macroeconomics Annual 2020, volume 35, Martin Eichenbaum and Erik Hurst, editors
We document a new fact about survey expectations: in response to the main shocks driving the business cycle, expectations of unemployment and inflation under-react initially but over-shoot later on. We show how previous, seemingly conflicting, evidence can be understood as different facets of this fact. We finally explain what the cumulated evidence means for macroeconomic theory. There is little support for theories emphasizing under-extrapolation or two close cousins of it, cognitive discounting and level-K thinking. Instead, the evidence favors the combination of dispersed, noisy information and over-extrapolation.
June 2020Imperfect Macroeconomic Expectations: Evidence and Theory
with George-Marios Angeletos, Zhen Huo: w27308
We document a new fact about expectations: in response to the main shocks driving the business cycle, expectations under-react initially but over-shoot later on. We show how previous, seemingly conflicting, evidence can be understood as different facets of this fact. We finally explain what the cumulated evidence means for macroeconomic theory. There is little support for theories emphasizing under-extrapolation or two close cousins of it, cognitive discounting and level-K thinking. Instead, the evidence favors the combination of dispersed, noisy information and over-extrapolation.
October 2019Inattentive Economies
with George-Marios Angeletos: w26413
We study the efficiency of competitive markets when people are rationally inattentive. Appropriate amendments of the Welfare Theorems hold if attention costs satisfy an invariance condition, which amounts to free disposal of decision-irrelevant aspects of the state of nature. This condition is satisfied by the Shannon mutual information formulation of attention costs. More generally, inefficiency emerges and Hayek’s (1945) argument about the informational optimality of prices fails. Markets are the best means of allocating scarce attention when agents gain nothing from directly contemplating prices rather than the entire state of nature.
December 2018Managing Expectations: Instruments vs. Targets
with George-Marios Angeletos: w25404
Should policymakers offer forward guidance in terms of a path for an instrument such as interest rates or a target for an outcome such as unemployment? We study how the optimal approach depends on a departure from rational expectations. People have a limited understanding of the behavior of others and of the general equilibrium (GE) effects of policy. The bite of such bounded rationality on implementability and welfare is minimized by target-based guidance if and only if GE feedbacks are strong enough. This offers a rationale for why central banks should shine the spotlight on unemployment when faced with a prolonged liquidity trap, a steep Keynesian cross, or a large financial accelerator.
 
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