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The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives

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  • John H. Cochrane

Abstract

This paper presents calculations of the utility cost to consumers of following alternative decision rules in the environments specified by tests of the intertemporal allocation of consumption on aggregate data. The alternatives include excess and inadequate sensitivity to income and interest rate changes and ignoring information. The calculations find that the costs of large deviations from the optimal decision rule--consumption equal to current income, for example--are on the order of l cent to $1 per quarter. They are interpreted to suggest that the theory does not make predictions that are robust to small inaccuracies of modeling, including small costs of transactions and information, and that those small costs can account for rejections of the theory as it is applied to aggregate US data.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2730.

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Date of creation: Oct 1988
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Publication status: published as The American Economic Review, Vol. 79, No. 3, pp. 319-337, (June 1989).
Handle: RePEc:nbr:nberwo:2730

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