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The Spirit of Capitalism and Excess Smoothness

  • 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)

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.

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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 484.

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Length: 21 pages
Date of creation: 2011
Date of revision:
Publication status: Published in Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 281-301, November.
Handle: RePEc:cuf:wpaper:484
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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