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Ambiguous information, permanent income, and consumption fluctuations

Donghoon Yoo ()

European Economic Review, 2019, vol. 119, issue C, 79-96

Abstract: This paper studies asymmetric responses in consumption, where the asymmetries are endogenously generated by agents’ preferences and incomplete knowledge about information quality. Agents form expectations about the future based on incomplete information, which is assumed to be ambiguous, and these future expectations, distorted by ambiguity, affect spending asymmetrically. With a noisy signal of uncertain quality, consumption features asymmetric responses: the absolute size of the responses depends on whether the signal delivers good or bad news. I estimate the model on the data for G7 countries by maximum likelihood, and the estimation results suggest that the ambiguity mechanism plays a modest role in driving observed skewness in the data.

Keywords: Ambiguity; Noisy information; Permanent income hypothesis (search for similar items in EconPapers)
JEL-codes: D83 E20 E32 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.euroecorev.2019.07.001

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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