The Spirit of Capitalism and Excess Smoothness

Yulei Luo (), William Smith and Heng-Fu Zou ()
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William Smith: Department of Economics, Fogelman College of Business & Economics, University of Memphis

No 484, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: 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.

Keywords: The spirit of capitalism; Consumption smoothing; Interest rate risk (search for similar items in EconPapers)
JEL-codes: C61 E21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2011
New Economics Papers: this item is included in nep-ias
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Published in Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 281-301, November.

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Journal Article: The Spirit of Capitalism and Excess Smoothness (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:484

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