Adaptive consumption behavior

Peter Howitt and Ömer Özak

Journal of Economic Dynamics and Control, 2014, vol. 39, issue C, 37-61

Abstract: In this paper we propose and study 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 that places few informational or computational demands on the consumer. We show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.

Keywords: Learning; Consumption function; Liquidity constraint; Dynamic programming (search for similar items in EconPapers)
JEL-codes: C63 E21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Working Paper: Adaptive Consumption Behavior (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:39:y:2014:i:c:p:37-61

DOI: 10.1016/j.jedc.2013.11.003

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