Myopia and Anchoring

Abstract

We develop an equivalence between the equilibrium effects of incomplete information and those of two behavioral distortions: myopia, or extra discounting of the future; and anchoring of current behavior to past behavior, as in models with habit persistence or adjustment costs. We show how these distortions depend on higher-order beliefs and GE mechanisms, and how they can be disciplined by evidence on expectations. We finally illustrate the use of our toolbox with a quantitative application in the context of inflation, a bridge to the HANK literature, and an extension to networks. (JEL C53, D83, D85, E12, E31, E37)