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Adaptive consumption behavior

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  • Howitt, Peter
  • Özak, Ömer

Abstract

In this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer. We show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 39 (2014)
Issue (Month): C ()
Pages: 37-61

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Handle: RePEc:eee:dyncon:v:39:y:2014:i:c:p:37-61

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Learning; Consumption function; Liquidity constraint; Dynamic programming;

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