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Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior

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  • Kakeu Johnson

    (Morehouse College, Department of Economics, 830 Westview Drive, S.W, Atlanta, Georgia 30314, USA)

  • Byron Sharri

    (Drew University, 36 Madison Avenue, Madison, New Jersey 07940, USA)

Abstract

This paper analyzes a continuous time stochastic growth model with a Duffie and Epstein (Duffie, D., and L. Epstein. 1992. “Stochastic Differential Utility.” Econometrica 60: 353–394.) recursive utility. We find that optimal consumption decisions are determined in a non trivial way by factors such as changes in expectations about future prospects (sentiment), and a matrix of weights that expresses the sensitivity of the consumer to a global macroeconomic risk. The weighting matrix can also be thought of as a measure of multivariate prudence.The sentiment channel is governed by two forces working in opposite directions; one is related to the consumer’s aversion to long-run risk and the other is related to the consumer’s aversion to short-run risk. The greater is the aversion to long-run risk relative to the aversion to short-run risk, the higher is the magnitude of the sentiment effect. This suggests a linkage between the sentiment effect and temporal risk attitudes.

Suggested Citation

  • Kakeu Johnson & Byron Sharri, 2016. "Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(1), pages 171-192, January.
    • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:1:p:171-192:n:5
    DOI: 10.1515/bejm-2014-0155
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    References listed on IDEAS

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    Cited by:

    1. Maria Vincenza Ciasullo & Gennaro Maione & Carlo Torre & Orlando Troisi, 2017. "What about Sustainability? An Empirical Analysis of Consumers’ Purchasing Behavior in Fashion Context," Sustainability, MDPI, vol. 9(9), pages 1-18, September.

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