Near-Rationality, Heterogeneity and Aggregate Consumption
AbstractThe simple permanent income model provides a good description of the medium-long run behavior of aggregate nondurables consumption, while it fails in describing its short run behavior. In this paper I present a non-representative agent model with near-rational microeconomic units that simultaneously explains the observed excess smoothness of consumption to wealth innovations, the excess sensitivity of consumption to lagged income changes, as well as small conditional asymmetries found in the data. In spite of the presence of large non-diversifiable idiosyncratic uncertainty, the estimated dollar equivalent utility cost of the micreconomic near-rational strategy required to explain the aggregate facts is only 0.26y percent of consumption per year, where y is the coefficient of relative risk aversion.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4035.
Date of creation: Mar 1992
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Publication status: published as Journal of Money, Credit and Banking, February 1995
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- Caballero, Ricardo J, 1995. "Near-Rationality, Heterogeneity, and Aggregate Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 29-48, February.
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1990_49, Columbia University, Department of Economics.
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- Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
- repec:fth:coluec:479 is not listed on IDEAS
- Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
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- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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