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Near-Rationality, Heterogeneity and Aggregate Consumption

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Ricardo J. Caballero

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Abstract

The 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4035.

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Date of creation: Mar 1992
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Publication status: published as Journal of Money, Credit and Banking, February 1995
Handle: RePEc:nbr:nberwo:4035

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References listed on IDEAS
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  1. John H. Cochrane, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
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  3. Caballero, R.J., 1990. "A Fallacy Of Composition," Discussion Papers 1990_01, Columbia University, Department of Economics.
  4. 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. [Downloadable!] (restricted)
  5. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  6. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Ricardo Reis, 2004. "Inattentive Consumers," NBER Working Papers 10883, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Angelos A. Antzoulatos, 1997. "Macroeconomic forecasts under the prism of error-correction models," Research Paper 9728, Federal Reserve Bank of New York. [Downloadable!]
  3. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Angelos A. Antzoulatos, 1997. "Non-linear consumption dynamics," Research Paper 9726, Federal Reserve Bank of New York. [Downloadable!]
  5. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics. [Downloadable!]
  6. Steven Cook, 2000. "Durability and Asymmetry in UK Consumers' Expenditure," International Review of Applied Economics, Taylor and Francis Journals, vol. 14(1), pages 113-121, January. [Downloadable!] (restricted)
  7. Katsunori Watanabe & Takayuki Watanabe & Tsutomu Watanabe, 1999. "Tax Policy and Consumer Spending: Evidence from Japanese Fiscal Experiments," NBER Working Papers 7252, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. James B. Bullard & George W. Evans & Seppo Honkapohja, 2007. "A model of near-rational exuberance," Working Papers 2007-009, Federal Reserve Bank of St. Louis. [Downloadable!]
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