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Moving costs, nondurable consumption and portfolio choice

  • Stokey, Nancy L.
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    The substantial adjustment cost for housing affects nondurable consumption and portfolio allocations, as well as the frequency of housing transactions. A simple theoretical model, roughly calibrated, is used to assess the quantitative impact of adjustment costs on those decisions. The impact on portfolios is found to be significant, suggesting that housing wealth should be useful in empirical studies of portfolio choice. The welfare loss from the transaction cost is also substantial. The effect on nondurable consumption is small, however, so adjustment costs can explain only a small part of the equity premium puzzle.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(09)00122-7
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    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 144 (2009)
    Issue (Month): 6 (November)
    Pages: 2419-2439

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    Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2419-2439
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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    1. Davis, Morris & Heathcote, Jonathan, 2001. "Housing and the Business Cycle," Working Papers 01-09, Duke University, Department of Economics.
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    7. Sanford J. Grossman & Guy Laroque, 1987. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
    8. David A. Marshall & Nayan G. Parekh, 1999. "Can Costs of Consumption Adjustment Explain Asset Pricing Puzzles?," Journal of Finance, American Finance Association, vol. 54(2), pages 623-654, 04.
    9. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
    10. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    11. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
    12. Marjorie Flavin & Shinobu Nakagawa, 2008. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," American Economic Review, American Economic Association, vol. 98(1), pages 474-95, March.
    13. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
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