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Durable Consumption and Asset Management with Transaction and Observation Costs

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  • Fernando Alvarez
  • Luigi Guiso
  • Francesco Lippi

Abstract

The empirical evidence on rational inattention lags the theoretical developments: micro evidence on one of the most immediate consequences of observation costs--the infrequent observation of state variables--is not available in standard datasets. We contribute to filling the gap using new household surveys. To match these data we modify existing models, shifting the focus from nondurable to durable consumption. The model features both observation and transaction costs and implies a mixture of time-dependent and state-dependent rules. Numerical simulations explain the frequencies of trading and observation of the median investor with small observation costs and larger transaction costs. (JEL D12, D14, E21, G11)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.5.2272
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 5 (August)
Pages: 2272-2300

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:2272-2300

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References

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  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  2. Orazio Attanasio & Luigi Guiso & Tuillo Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," NBER Working Papers 6593, National Bureau of Economic Research, Inc.
  3. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  4. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity Premium Puzzle," Harvard Institute of Economic Research Working Papers 1947, Harvard - Institute of Economic Research.
  5. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
  6. Yi-Li Chien & Harold L. Cole & Hanno Lustig, 2009. "Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-balancing?," NBER Working Papers 15382, National Bureau of Economic Research, Inc.
  7. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1909-1960.
  8. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  9. Fernando E. Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," NBER Working Papers 13416, National Bureau of Economic Research, Inc.
  10. Ricardo Reis, 2004. "Inattentive Consumers," Working Papers 135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  11. Sims, Christopher A., 2005. "Rational inattention: a research agenda," Discussion Paper Series 1: Economic Studies 2005,34, Deutsche Bundesbank, Research Centre.
  12. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 879-914.
  13. Luigi Guiso & Tullio Jappelli, 2007. "Information Acquisition and Portfolio Performance," Economics Working Papers ECO2007/45, European University Institute.
  14. Yosef Bonaparte & Russell Cooper, 2009. "Costly Portfolio Adjustment," NBER Working Papers 15227, National Bureau of Economic Research, Inc.
  15. Duffie, Darrell & Sun, Tong-sheng, 1990. "Transactions costs and portfolio choice in a discrete-continuous-time setting," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 35-51, February.
  16. Stokey, Nancy L., 2009. "Moving costs, nondurable consumption and portfolio choice," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2419-2439, November.
  17. Andrew B. Abel & Janice C. Eberly & Stavros Panageas, 2007. "Optimal Inattention to the Stock Market," American Economic Review, American Economic Association, vol. 97(2), pages 244-249, May.
  18. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November.
  19. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Fernando Alvarez & Francesco Lippi, 2012. "The Demand of Liquid Assets with Uncertain Lumpy Expenditures," NBER Working Papers 18152, National Bureau of Economic Research, Inc.
  2. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  3. Hui Chen & Michael Michaux & Nikolai Roussanov, 2013. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," NBER Working Papers 19421, National Bureau of Economic Research, Inc.
  4. YiLi Chien & Kanda Naknoi, 2011. "The Risk Premium and Long-Run Global Imbalances," Purdue University Economics Working Papers 1266, Purdue University, Department of Economics.
  5. Riccardo Giacomelli & Elisa Luciano, 2011. "Equilibrium price of immediacy and infrequent trade," Carlo Alberto Notebooks 221, Collegio Carlo Alberto, revised 2013.
  6. Jeffrey V. Butler & Luigi Guiso & Tullio Jappelli, 2011. "The role of intuition and reasoning in driving aversion to risk and ambiguity," EIEF Working Papers Series 1107, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2011.
  7. Alvarez, Fernando E & Lippi, Francesco & Paciello, Luigi, 2010. "Optimal price setting with observation and menu costs," CEPR Discussion Papers 7861, C.E.P.R. Discussion Papers.
  8. Fernanda Nechio, 2010. "Foreign stock holdings: the role of information," Working Paper Series 2010-26, Federal Reserve Bank of San Francisco.
  9. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
  10. Aubhik Khan & Julia Thomas, . "Revisiting the Tale of Two Interest Rates with Endogenous Market Segmentation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

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