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"Rule-of-Thumb" Consumption, Intertemporal Substitution, and Risk Aversion

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  • Weber, Christian E

Abstract

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.

Suggested Citation

  • Weber, Christian E, 2000. ""Rule-of-Thumb" Consumption, Intertemporal Substitution, and Risk Aversion," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 497-502, October.
  • Handle: RePEc:bes:jnlbes:v:18:y:2000:i:4:p:497-502
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    Cited by:

    1. Weber, Christian E., 2002. "Intertemporal non-separability and "rule of thumb" consumption," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 293-308, March.
    2. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank, Research Department.
    3. Andrew Keinsley, 2013. "Do You Mind if I Round?: Eliminating the Penny A Structural Analysis," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201309, University of Kansas, Department of Economics.
    4. Stanislav Anatolyev, 2007. "Optimal Instruments In Time Series: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 143-173, February.
    5. Jeffrey M. Wooldridge, 2001. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 87-100, Fall.
    6. Bhatt, Vipul & Kishor, Kundan & Marfatia, Hardik, 2017. "Estimating excess sensitivity and habit persistence in consumption using Greenbook forecast as an instrument," MPRA Paper 79748, University Library of Munich, Germany.
    7. Larin, Alexander & Novak, Anna & Khvostova, Irina, 2013. "Consumption dynamics in Russia: Estimates on microdata," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 32(4), pages 29-44.
    8. Chen, Ming-Hsiang & Bidarkota, Prasad V., 2004. "Consumption equilibrium asset pricing in two Asian emerging markets," Journal of Asian Economics, Elsevier, vol. 15(2), pages 305-319, April.
    9. Stuart Hyde & Mohamed Sherif, 2004. "Don't break the habit: structural stability tests of consumption models in the UK," Money Macro and Finance (MMF) Research Group Conference 2003 49, Money Macro and Finance Research Group.

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