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The Spirit of Capitalism, Precautionary Savings, and Consumption

  • Yulei Luo

    (School of Economics and Finance, University of Hong Kong)

  • William T. Smith

    (Department of Economics at Fogelman College of Business and Economics, University of Memphis)

  • Heng-fu Zou

    (The World Bank
    CEMA at the Central University of Finance and Economics
    Shenzhen University
    IAS at Wuhan University)

Recent research has shown that the "spirit of capitalism"¡ªa preference for wealth itself, in addition to consumption¡ªhas important implications for growth and asset pricing. This paper explores how the spirit of capitalism affects saving and consumption behavior. We demonstrate that the spirit of capitalism may reduce the importance of precautionary savings. It can also explain the excess sensitivity puzzle: the spirit of capitalism causes dramatic deviations from a random walk. It may also offer a partial explanation of the excess smoothness puzzle.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 274.

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Length: 12 pages
Date of creation: 08 Nov 2006
Date of revision:
Publication status: Published in Journal of Money, Credit and Banking, Volume 41, Issue 2-3, pages 543¨C554, March-April 2009
Handle: RePEc:cuf:wpaper:274
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  2. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," CEMA Working Papers 79, China Economics and Management Academy, Central University of Finance and Economics.
  3. John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
  4. Zou, Heng-fu, 1994. "'The spirit of capitalism' and long-run growth," European Journal of Political Economy, Elsevier, vol. 10(2), pages 279-293, July.
  5. Liutang Gong & Heng-fu Zou, 2001. "Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness," CEMA Working Papers 53, China Economics and Management Academy, Central University of Finance and Economics.
  6. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  7. Liutang Gong & Heng-fu Zou, 2001. "Money, social status, and capital accumulation in a cash-in-advance model," CEMA Working Papers 55, China Economics and Management Academy, Central University of Finance and Economics.
  8. Eric R. Young, 2004. "The Wealth Distribution and the Demand for Status," Macroeconomics 0410008, EconWPA.
  9. Wang, Neng, 2006. "Generalizing the permanent-income hypothesis: Revisiting Friedman's conjecture on consumption," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 737-752, May.
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