Robust Permanent Income in General Equilibrium

Yulei Luo (), Jun Nie and Eric Young

MPRA Paper from University Library of Munich, Germany

Abstract: This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to quantitatively explore how the preference for robustness (RB) affects the interest rate, the dynamics of consumption and income, and the welfare costs of model uncertainty in general equilibrium. We show that RB significantly reduces the equilibrium interest rate, and reduces (increases) the relative volatility of consumption growth to income growth when the income process is stationary (non-stationary). Furthermore, we find that the welfare costs of model uncertainty are nontrivial for plausibly estimated income processes and calibrated RB parameter values. Finally, we extend the benchmark model to consider the separation of risk aversion and intertemporal substitution, incomplete information about income, and regime-switching in income growth.

Keywords: Robustness; Model Uncertainty; Precautionary Savings; the Permanent Income Hypothesis; Low Interest Rates; Consumption Inequality; General Equilibrium. (search for similar items in EconPapers)
JEL-codes: C6 D5 D52 E2 E21 (search for similar items in EconPapers)
Date: 2015-04-29
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Robust permanent income in general equilibrium (2015)
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