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Near-Rationality, Heterogeneity, and Aggregate Consumption

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  • Caballero, Ricardo J

Abstract

The simple permanent-income model provides a good description of the medium-long run behavior of aggregate non-durables consumption, but fails to describe its short run behavior. In this paper I, present a non-representative agent model with near-rational macroeconomic units a la Akerlof-Yellen that simultaneously explains the observed excess smoothness of consumption to wealth innovations and the excess sensitivity of consumption to lagged income changes. This models also explains conditional asymmetries found in the data: in good times, consumers respond more promptly to positive than negative wealth shocks; while the opposite is true in bad times. In spite of the presence of large non-diversifiable idiosyncratic uncertainty, the estimated dollar equivalent utility cost of the macroeconomic near-rational strategy required to explain the aggregate facts is only about 0.037 percent of consumption per year, where [gamma] is the coefficient of relative risk aversion. Copyright 1995 by Ohio State University Press.

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  • Caballero, Ricardo J, 1995. "Near-Rationality, Heterogeneity, and Aggregate Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 29-48, February.
  • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:29-48
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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    3. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-384, April.
    4. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-337, June.
    5. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Antzoulatos, Angelos A., 1998. "Macroeconomic forecasts under the prism of error-correction models," Journal of Economics and Business, Elsevier, vol. 50(6), pages 535-550, November.
    2. repec:pri:wwseco:dp229 is not listed on IDEAS
    3. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
    4. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    5. Carlos Borondo, 1994. "La rigidez nominal de los precios de la Nueva Economía Keynesiana: una panorámica," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 245-288, May.
    6. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics.
    7. Jonathan A. Parker, 2015. "Why Don't Households Smooth Consumption? Evidence from a 25 Million Dollar Experiment," NBER Working Papers 21369, National Bureau of Economic Research, Inc.
    8. Antzoulatos, Angelos A., 1996. "Consumer credit and consumption forecasts," International Journal of Forecasting, Elsevier, vol. 12(4), pages 439-453, December.
    9. Bullard, James & Evans, George W. & Honkapohja, Seppo, 2010. "A Model Of Near-Rational Exuberance," Macroeconomic Dynamics, Cambridge University Press, vol. 14(02), pages 166-188, April.
    10. Katsunori Watanabe & Takayuki Watanabe & Tsutomu Watanabe, 1999. "Tax Policy and Consumer Spending: Evidence from Japanese Fiscal Experiments," NBER Working Papers 7252, National Bureau of Economic Research, Inc.
    11. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-2553, October.
    12. Gabaix, Xavier, 2015. "Behavioral Macroeconomics Via Sparse Dynamic Programming," CEPR Discussion Papers 11026, C.E.P.R. Discussion Papers.
    13. repec:pri:wwseco:dp231 is not listed on IDEAS
    14. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23.
    15. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    16. Rodney Ramcharan & Amir Kermani & Marco Di Maggio, 2015. "Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging," 2015 Meeting Papers 256, Society for Economic Dynamics.
    17. Steven Cook, 2000. "Durability and Asymmetry in UK Consumers' Expenditure," International Review of Applied Economics, Taylor & Francis Journals, vol. 14(1), pages 113-121.
    18. Watanabe, Katsunori & Watanabe, Takayuki & Watanabe, Tsutomu, 2001. "Tax policy and consumer spending: evidence from Japanese fiscal experiments," Journal of International Economics, Elsevier, vol. 53(2), pages 261-281, April.
    19. Angelos A. Antzoulatos, 1997. "Non-linear consumption dynamics," Research Paper 9726, Federal Reserve Bank of New York.
    20. Finocchiaro, Daria, 2011. "Inattention, wealth inequality and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 146-155, March.
    21. repec:pri:wwseco:dp232 is not listed on IDEAS
    22. Kurt F. Lewis & Francis A. Longstaff & Lubomir Petrasek, 2017. "Asset Mispricing," NBER Working Papers 23231, National Bureau of Economic Research, Inc.

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