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The Spirit of Capitalism and Excess Smoothness

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Author Info

  • Yulei Luo

    (The University of Hong Kong)

  • William T. Smith

    (Department of Economics, Fogelman College of Business & Economics, University of Memphis)

  • Heng-fu Zou

    (CEMA, Central University of Finance and Economics, Shenzhen University)

Abstract

In a recent paper [Luo, Smith, and Zou (2009)] we showed that the spirit of capitalism could in theory resolve the two fundamental anomalies of modern consumption theory, excess sensitivity and excess smoothness. However, that basic model could not plausibly explain the empirical magnitude of excess smoothness. In this paper we develop two extensions of the model ¡ª one with transitory and permanent shocks to income, the other with a stochastic interest rate ¡ª that where the spirit of capitalism can explain excess smoothness.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 484.

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Length: 21 pages
Date of creation: 2011
Date of revision:
Publication status: Published in Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 281-301, November.
Handle: RePEc:cuf:wpaper:484

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Web page: http://cema.cufe.edu.cn/
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Keywords: The spirit of capitalism; Consumption smoothing; Interest rate risk;

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References

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Cited by:
  1. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 283-298, November.
  2. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 219-260, May.

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