The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives
This paper presents calculations of the utility cost to consumers of following alternative decision rules in the environments specified by tests of the intertemporal allocation of consumption on aggregate data. The alternatives include excess and inadequate sensitivity to income and interest rate changes and ignoring information. The calculations find that the costs of large deviations from the optimal decision rule--consumption equal to current income, for example--are on the order of l cent to $1 per quarter. They are interpreted to suggest that the theory does not make predictions that are robust to small inaccuracies of modeling, including small costs of transactions and information, and that those small costs can account for rejections of the theory as it is applied to aggregate US data.
|Date of creation:||Oct 1988|
|Publication status:||published as The American Economic Review, Vol. 79, No. 3, pp. 319-337, (June 1989).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Gregory Mankiw, N. & Shapiro, Matthew D., 1985.
"Trends, random walks, and tests of the permanent income hypothesis,"
Journal of Monetary Economics,
Elsevier, vol. 16(2), pages 165-174, September.
- Matthew D. Shapiro & N. Gregory Mankiw, 1984. "Trends, Random Walks, and Tests of the Permanent Income Hypothesis," Cowles Foundation Discussion Papers 725, Cowles Foundation for Research in Economics, Yale University.
- Cochrane, John H. & Sbordone, Argia M., 1988. "Multivariate estimates of the permanent components of GNP and stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 255-296.
- George A. Akerlof, 1979. "Irving Fisher on his Head: The Consequences of Constant Threshold-Target Monitoring of Money Holdings," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 169-187.
- Larry G. Epstein & Stanley E. Zin, 1987. "Substitution, Risk Aversion and the Temporal Behaviour of Consumption and Asset Returns I: A Theoretical Framework," Working Papers 699, Queen's University, Department of Economics.
- Larry G. Epstein & Stanley E. Zin, 1987. "Substitution, Risk Aversion and the Temporal Behaviour of Consumption and Asset Returns II: An Empirical Analysis," Working Papers 698, Queen's University, Department of Economics.
- Jones, Stephen R G & Stock, James H, 1987. "Demand Disturbances and Aggregate Fluctuations: The Implications of Near Rationality," Economic Journal, Royal Economic Society, vol. 97(385), pages 49-64, March.
- John Y. Campbell & Angus Deaton, 1987. "Is Consumption Too Smooth?," NBER Working Papers 2134, National Bureau of Economic Research, Inc.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2730. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.