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Consumption

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  • Robert E. Hall

Abstract

Macroeconomic research on consumption has been influenced profoundly by rational expectations. First, rational expectations together with the hypothesis of constant expected real interest rates implies that consumption should evolve as a random walk. Much of the research of the past decade has been devoted to testing the random walk hypothesis and to explaining its failure. Three branches of the literature have developed. The first relies on the durability of consumption to explain deviations from the random walk property. The second invokes liquidity constraints which block consumers from the credit market transactions needed to make consumption follow a random walk when income fluctuates up and down. The third branch dispenses with the assumption that expected real interest rates are constant. It attempts to explain deviations from the random walk in terms of intertemporal substitution.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2265.

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Date of creation: May 1987
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Publication status: published as Modern Business Cycle Theory, Robert J. Barro, ed., Harvard University Press, Cambridge, MA 1989
Handle: RePEc:nbr:nberwo:2265

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  1. Joseph G. Altonji & Aloysius Siow, 1986. "Testing the Response of Consumption to Income Changes with (Noisy) PanelData," NBER Working Papers 2012, National Bureau of Economic Research, Inc.
  2. Robert J. Shiller, 1982. "Consumption, Asset Markets, and Macroeconomic Fluctuations," NBER Working Papers 0838, National Bureau of Economic Research, Inc.
  3. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 305-46, April.
  4. Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 508-19, June.
  5. Sanford J. Grossman & Angelo Melino & Robert J. Shiller, 1985. "Estimating the Continuous Time Consumption Based Asset Pricing Model," NBER Working Papers 1643, National Bureau of Economic Research, Inc.
  6. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  7. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  8. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  9. Thomas J. Sargent, 1977. "Rational expectations, econometric exogeneity and consumption," Staff Report, Federal Reserve Bank of Minneapolis 25, Federal Reserve Bank of Minneapolis.
  10. Browning, Martin, 1987. "Eating, Drinking, Smoking, and Testing the Lifecycle Hypothesis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 329-45, May.
  11. Selden, Larry, 1978. "A New Representation of Preferences over "Certain A Uncertain" Consumption Pairs: The "Ordinal Certainty Equivalent" Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 1045-60, September.
  12. Peter M. Garber & Robert G. King, 1983. "Deep Structral Excavation? A Critique of Euler Equation Methods," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0031, National Bureau of Economic Research, Inc.
  13. Darby, Michael R, 1972. "The Allocation of Transitory Income Among Consumers' Assets," American Economic Review, American Economic Association, American Economic Association, vol. 62(5), pages 928-41, December.
  14. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers, Federal Reserve Bank of Minneapolis 127, Federal Reserve Bank of Minneapolis.
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