Inflation expectations play a central role in macroeconomics. In this paper, I document a new empirical pattern in inflation expectations using the New York Fed’s Survey of Consumer Expectations: subadditivity. Headline inflation expectations are lower than the weighted sum of category-specific expectations, violating internal consistency and indicating that elicitation methods matter for expectation formation. I then propose a model of expectation formation, based on psychological models of memory, which combines selective attention to price increases and context-dependent recall of previous inflation experiences. This model is consistent with both the subadditivity pattern and the well-documented upward bias in aggregate inflation expectations. I test the model’s implications in the data and show that infrequently purchased categories such as rent and medical services are underweighted despite their large expenditure shares. These findings have important implications for economic policy, for instance, suggesting that targeting core inflation will worsen forecast errors.

Selling assets is a prevalent method of consumption smoothing in many low- and middle-income countries worldwide.  We study the relevance of asset market liquidity constraints — the ability to realise assets as cash on hand — for the adoption of agricultural technology in Kenya. Using a randomised survey experiment, we demonstrate that individuals consider asset market liquidity in their decision-making and are willing to trade off returns for liquidity. We characterise individuals' valuation of liquidity using a `buyback option' that would ease secondary market friction in the context of adopting small mechanisation tools. We elicit the incentivised willingness to pay for this buyback guarantee and find that farmers are willing to pay 15% of the asset value to obtain a guaranteed resale market for it within 6 months. Demand for asset liquidity is concentrated among individuals who have experienced more weather shocks in the past and expect to experience expenditure shocks in the future, highlighting the role of liquid secondary markets as a type of insurance. Finally, by embedding frictional secondary markets in a general equilibrium model, we show that the absence of secondary markets depresses agents’ valuations of capital used to adopt new technologies, inducing underinvestment in more efficient inputs and yielding a lower-productivity equilibrium. 

In an overlapping generations economy with real shocks, monetary policy controls the informativeness of prices by setting a distribution function for its future money supply decisions. Optimal monetary policy sets the uncertainty about its actions to a maximum, yielding prices completely uninformative about the real shocks. This policy mimics an intergenerational insurance contract and maximizes the expected utilitarian welfare. A no social value of public information theorem establishes that releasing public signals about real shocks does not raise ex-ante welfare: the planner’s optimum can be implemented without such information, and the optimal monetary policy already achieves it.

This paper provides a theory of sustainable debt rollover in an economy with market power in production and limited stock market participation. These frictions result in return heterogeneity: while equity holders receive the full marginal product of their investment, bondholders receive only risk-free returns. Firm markups and the risk premium depress risk-free interest rates, thereby lowering the government's debt servicing costs. In this economy, the government can borrow more than the present discounted value of its surpluses while running perpetual deficits. This is because the government can generate not only primary budget surpluses but also endogenous fiscal revenues from providing a safe financial instrument for saving to those excluded from the stock market. Endogenous fiscal revenues are defined as the difference between a debt instrument's fundamental value and its market value. The government has an arbitrage opportunity to roll over public debt by using this enlarged fiscal space. At the same time, firms earn supernormal profits, leading the economy to grow at a rate above the risk-free interest rate. The model qualitatively matches the stylized facts and provides a step toward resolving the debt valuation puzzle.