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Adaptive Consumption Behavior

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  • Peter Howitt
  • Ömer Özak

Abstract

This paper proposes and studies a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure, which, although sophisticated, places few informational or computational demands on the consumer. We show that under a variety of settings, our procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.

Suggested Citation

  • Peter Howitt & Ömer Özak, 2009. "Adaptive Consumption Behavior," NBER Working Papers 15427, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15427
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    Cited by:

    1. Yıldızoğlu, Murat & Sénégas, Marc-Alexandre & Salle, Isabelle & Zumpe, Martin, 2014. "Learning The Optimal Buffer-Stock Consumption Rule Of Carroll," Macroeconomic Dynamics, Cambridge University Press, vol. 18(4), pages 727-752, June.
    2. Salle, Isabelle & Seppecher, Pascal, 2016. "Social Learning About Consumption," Macroeconomic Dynamics, Cambridge University Press, vol. 20(7), pages 1795-1825, October.
    3. Kiichi Tokuoka, 2015. "Do Consumers Learn from Their Own Experiences?," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 466-491, December.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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