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The Spirit of Capitalism and Excess Smoothness

Author

Listed:
  • Yulei Luo

    (The University of Hong Kong)

  • William T. Smith

    (Department of Economics, Fogelman College of Business & Economics, University of Memphis)

  • Heng-fu Zou

    (CEMA, Central University of Finance and Economics
    Shenzhen University
    Wuhan University)

Abstract

In a recent paper [Luo, Smith, and Zou (2009)] we showed that the spirit of capitalism could in theory resolve the two fundamental anomalies of modern consumption theory, excess sensitivity and excess smoothness. However, that basic model could not plausibly explain the empirical magnitude of excess smoothness. In this paper we develop two extensions of the model ¡ª one with transitory and permanent shocks to income, the other with a stochastic interest rate ¡ª that where the spirit of capitalism can explain excess smoothness.

Suggested Citation

  • Yulei Luo & William T. Smith & Heng-fu Zou, 2009. "The Spirit of Capitalism and Excess Smoothness," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 281-301, November.
    • Handle: RePEc:cuf:journl:y:2009:v:10:i:2:p:281-301
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    2. Yuanping Wang & Yingjie Niu & Siwen Gong, 2022. "Robust consumption policy with the desire for wealth accumulation," Review of Economics of the Household, Springer, vol. 20(3), pages 993-1025, September.
    3. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 283-298, November.
    4. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.
    5. Terézia Vančová, 2019. "The Excess Smoothness and Sensitivity of Consumption in the V4 Countries," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 67(6), pages 1653-1663.

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    More about this item

    Keywords

    The spirit of capitalism; Consumption smoothing; Interest rate risk;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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