Harvard University

To develop behaviorally informed versions of basic macroeconomic models

  • Amount $326,688
  • City Cambridge, MA
  • Investigator Xavier Gabaix
  • Initiative Behavioral and Regulatory Effects on Decision-making (BRED)
  • Year 2016
  • Program Research
  • Sub-program Economic Institutions, Behavior, & Performance

This grant funds the work of theoretical macroeconomist Xavier Gabaix, who is endeavoring to explain puzzling macroeconomic phenomena by importing into macroeconomic models insights gleaned from behavioral psychology. Contrary to the prevailing wisdom among macroeconomists, Gabaix’s work assumes human beings have limited attentional resources and must make choices about what to pay attention to and what to ignore. When attention is scarce, Gabaix argues, the pressing concerns of today crowd out consideration of distant tomorrows. This much microeconomists have known for some time. Gabaix’s contribution has been to show how this scarcity of attention and the consequent focus on the now can, in the aggregate, have predictable macroeconomic effects. Indeed, in early work Gabaix has used these assumptions to predict certain stubborn macroeconomic facts—like the absence of inflation in the U.S. despite years of low interest rates—that have vexed more traditional economic models. Funds from this grant provide three years of support to Gabaix to expand and continue this work. Supported activities include the testing and calibrating of Gabaix’s models against real-world data and the writing of a textbook that uses his framework to explain standard, well-understood macroeconomic phenomena.

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