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Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior

Author

Listed:
  • Kakeu Johnson

    (Morehouse College, Department of Economics, 830 Westview Drive, S.W, Atlanta, Georgia 30314, USA)

  • Byron Sharri

    (Drew University, 36 Madison Avenue, Madison, New Jersey 07940, USA)

Abstract

This paper analyzes a continuous time stochastic growth model with a Duffie and Epstein (Duffie, D., and L. Epstein. 1992. “Stochastic Differential Utility.” Econometrica 60: 353–394.) recursive utility. We find that optimal consumption decisions are determined in a non trivial way by factors such as changes in expectations about future prospects (sentiment), and a matrix of weights that expresses the sensitivity of the consumer to a global macroeconomic risk. The weighting matrix can also be thought of as a measure of multivariate prudence.The sentiment channel is governed by two forces working in opposite directions; one is related to the consumer’s aversion to long-run risk and the other is related to the consumer’s aversion to short-run risk. The greater is the aversion to long-run risk relative to the aversion to short-run risk, the higher is the magnitude of the sentiment effect. This suggests a linkage between the sentiment effect and temporal risk attitudes.

Suggested Citation

  • Kakeu Johnson & Byron Sharri, 2016. "Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(1), pages 171-192, January.
    • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:1:p:171-192:n:5
    DOI: 10.1515/bejm-2014-0155
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    References listed on IDEAS

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    1. Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," Review of Finance, European Finance Association, vol. 15(1), pages 1-28.
    2. Anne Epaulard & Aude Pommeret, 2003. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 672-684, July.
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    7. Max Gillman & Michal Kejak & Michal Pakoš, 2015. "Learning about Rare Disasters: Implications For Consumption and Asset Prices," Review of Finance, European Finance Association, vol. 19(3), pages 1053-1104.
    8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
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    Cited by:

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    2. Diana Margarita Vera Arroyo & Mariuxi Elizabeth Garcés Wila & José Gilberto Argandoña Moreira & Francisco Abel Gresely Santi & Jonathan Patricio Cárdenas-Ruperti, 2024. "Evolution and Determinants of Consumer Interest in Renewable Energy in Ecuador: A Temporal Perspective," International Journal of Energy Economics and Policy, Econjournals, vol. 14(4), pages 642-653, July.

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    More about this item

    Keywords

    aversion to long-run risk; aversion to short-run risk; continuous-time stochastic recursive utility; endogenous growth model; sentiment about the future; sentiment effect;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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