"Rule-of-Thumb" Consumption, Intertemporal Substitution, and Risk Aversion
This article reexamines evidence that some 5O% of disposable income goes to households who simply consume their current incomes. Previous studies of such "rule-of-thumb" behavior have typically used log-linear Euler equations and have not distinguished between intertemporal substitution and relative risk aversion. In contrast, I use generalized method of moments to estimate the importance of rule-of-thumb behavior and separate intertemporal substitution from risk aversion by using the Epstein-Zin utility function. Using postwar U.S. data, I cannot reject the hypothesis that all income goes to permanent-income households--that is, that there are no rule-of-thumb households.
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Volume (Year): 18 (2000)
Issue (Month): 4 (October)
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