Preferences are important when thinking about macroeconomic problems and questions. Differences in preferences might, for example, explain cross-country variations in economic fundamentals.In recent years, differences in preferences across countries and cultures have been studied more frequently, usually concentrating on micro evidence. However, it is an open question as to how differences in average preferences affect the aggregate economy. Coming from a macroeconomic perspective, we test whether preferences stated in Kahneman and Tversky’s prospect theory, namely, reference point dependence and loss aversion, prevail on the aggregate and whether the average degree of loss aversion differs across countries.We find evidence of loss aversion for a broad set of OECD countries, while the average loss aversion clearly differs across these countries. We find little evidence that these differences could be explained by micro evidence. Furthermore, we analyse whether the different degrees of loss aversion correlate with economic fundamentals such as the level of GDP and consumption per capita. We find that indeed loss aversion is negatively correlated with GDP and consumption per capita and positively correlated with consumption smoothing.
Firms adjust their employment to changes in output. But they tend to adjust employment only partially. Typically, labor is hoarded in downturns and subsequently ﬁrms have to hire less in upturns. Investment in labor hoarding may therefore be inﬂuenced by factors that impede investments, such as ﬁnancial constraints. Using ﬁrm-level data, we show that ﬁnancial constraints increase the sensitivity of employment to ﬂuctuations in output considerably. When output changes, ﬁnancially constrained ﬁrms resize their labor force substantially more than ﬁrms that have abundant funding. Limited internal funding opportunities turn out to be just as important as the reduced access to external ﬁnance. The strongest impact, however, is observed when internal and external constraints occur jointly. In that case, ﬁrms lay oﬀ two-and-a-half times more employees than unconstrained ﬁrms. The amplifying eﬀect of ﬁnancial constraints is similar in upturns and downturns, implying that ﬁnancially constrained ﬁrms not only reduce their workforce more when demand decreases, but they also hire more labor when demand increases.
We develop and apply a procedure to test the welfare implications of a beauty and non-beauty contest based on survey forecasts of interest rates and yields in a large country sample over an extended period of time. In most countries, interest-rate forecasts are unbiased and consistent with both models, but are rarely supported by yield forecasts. In half of the countries, a higher precision of public information regarding interest rates increases welfare. During forward guidance, public information is less precise than private information.
We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.