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Moving costs, nondurable consumption and portfolio choice

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  • Stokey, Nancy L.
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    Abstract

    The substantial adjustment cost for housing affects nondurable consumption and portfolio allocations, as well as the frequency of housing transactions. A simple theoretical model, roughly calibrated, is used to assess the quantitative impact of adjustment costs on those decisions. The impact on portfolios is found to be significant, suggesting that housing wealth should be useful in empirical studies of portfolio choice. The welfare loss from the transaction cost is also substantial. The effect on nondurable consumption is small, however, so adjustment costs can explain only a small part of the equity premium puzzle.

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    File URL: http://www.sciencedirect.com/science/article/B6WJ3-4XH5MSB-1/2/498997795005cf5035f15415c2cf81ee
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 144 (2009)
    Issue (Month): 6 (November)
    Pages: 2419-2439

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    Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2419-2439

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    Web page: http://www.elsevier.com/locate/inca/622869

    Related research

    Keywords: Adjustment cost Housing Durable goods Portfolio choice Equity premium puzzle;

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    Cited by:
    1. Fernando Alvarez & Luigi Guiso & Francesco Lippi, 2010. "Durable Consumption and Asset Management with Transaction and Observation Costs," Economics Working Papers ECO2010/04, European University Institute.
    2. Galina Vereshchagina, 2014. "Preferences for Risk in Dynamic Models with Adjustment Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 86-106, January.
    3. William Hardin & Sheng Guo, 2012. "Wealth, Composition, Housing, Income, and Consumption," Working Papers 1201, Florida International University, Department of Economics.
    4. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2010. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium," NBER Working Papers 15988, National Bureau of Economic Research, Inc.
    5. Sheng Guo & William Hardin, 2014. "Wealth, Composition, Housing, Income and Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 221-243, February.
    6. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
    7. Roine Vestman, 2013. "Limited Stock Market Participation Among Renters and Home Owners," 2013 Meeting Papers 549, Society for Economic Dynamics.

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