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Hand-to-Mouth Consumers and Asset Prices

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  • Weil, P.

Abstract

Many consumers seem to lead a hand-to-mouth existence: they simplyconsume their current income. This may be the result of unsophisticatedbehavior (non-optimizing, or ‘rule-of-thumb' consumers), or the reflection ofan inability to trade in asset markets due to infinite transactions costs. Theobjective of this paper is to explore, in a very simple model, the implicationsfor equilibrium asset prices of the presence of hand-to-mouth consumers. Iwill establish that allowing for the existence of hand-to-mouth consumerscontributes, under plausible assumptions, to the resolution of the equitypremium puzzle' and of the riskfree rate puzzle. As a consequence, thesame phenomenon - hand-to-mouth consumption - which Campbell andMankiw (1989) have shown to be crucial to the description of the time-seriesbehavior of aggregate consumption has the potential of explaining assetmarket data (...).
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Suggested Citation

  • Weil, P., 1991. "Hand-to-Mouth Consumers and Asset Prices," Harvard Institute of Economic Research Working Papers 1562a, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:1562a
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    Cited by:

    1. Jaccard, Ivan, 2022. "The trade-off between public health and the economy in the early stage of the COVID-19 pandemic," Working Paper Series 2690, European Central Bank.
    2. Takuma Kunieda & Tarishi Matsuoka & Akihisa Shibata, 2017. "Asset Bubbles, Technology Choice, and Financial Crises," Discussion Paper Series 157, School of Economics, Kwansei Gakuin University, revised Feb 2017.
    3. R. Basselier & G. Minne & G. Langenus, 2019. "Why has Belgian private consumption growth been so moderate in recent years?," Economic Review, National Bank of Belgium, issue i, pages 51-67, June.
    4. Hiroaki OHNO, 2011. "Limited Market Participation, Financial Intermediaries,And Endogenous Growth," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 53-62, August.
    5. Tyrowicz, Joanna, 2020. "Are incentivized old-age savings schemes effective under incomplete rationality?," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224526, Verein für Socialpolitik / German Economic Association.
    6. Daria Pignalosa, 2021. "The Euler Equation Approach: Critical Implications of Recent Developments in the Theory of Intertemporal Choice," Bulletin of Political Economy, Bulletin of Political Economy, vol. 15(1), pages 1-43, June.
    7. Artur Rutkowski, 2019. "Evaluating an old-age voluntary saving scheme under incomplete rationality," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 55-94.
    8. Michel Alexandre & Gilberto Tadeu Lima & Luca Riccetti & Alberto Russo, 2023. "The financial network channel of monetary policy transmission: an agent-based model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 533-571, July.
    9. Ohno, Hiroaki, 2009. "Incomplete market participation, endogenous endowment risks and welfare," Journal of Economics and Business, Elsevier, vol. 61(5), pages 392-403, September.
    10. Lorenzo Menna & Patrizio Tirelli, 2014. "The Equity Premium in a DSGE Model with Limited Asset Market Participation," Working Papers 275, University of Milano-Bicocca, Department of Economics, revised Jun 2014.
    11. Joanna Tyrowicz & Krzysztof Makarski & Artur Rutkowski, 2020. "Fiscal incentives to pension savings – are they efficient?," Working Paper series 20-06, Rimini Centre for Economic Analysis.
    12. Krusell, Per & Smith, Anthony Jr., 1996. "Rules of thumb in macroeconomic equilibrium A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 527-558, April.

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