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Hand-to-mouth consumers, rule-of-thumb savers, and optimal control

Orlando Gomes ()

Journal of Economic Interaction and Coordination, 2021, vol. 16, issue 2, No 1, 229-263

Abstract: Abstract Contemporaneous research in macroeconomics is experiencing a methodological transition. The well-established representative agent optimal control model, which has served for many decades as the fundamental point of reference to approach most of the aggregate phenomena in economics, is being gradually adapted or replaced. In the new settings, agent heterogeneity prevails: while some agents eventually continue to take optimal intertemporal decisions, others do not possess the ability or the willingness to do so, and therefore resort to simple heuristics in their decision-making processes. In this study, the basic Ramsey growth model of intertemporal choice is reinterpreted in the light of the heterogeneity assumption. Four different frameworks are proposed, and the respective dynamics investigated; these frameworks contemplate: (i) the coexistence of optimal planners and hand-to-mouth consumers; (ii) the coexistence of optimal planners and rule-of-thumb savers; (iii) intertemporal discount rate heterogeneity with endogenous determination of hand-to-mouth behavior; (iv) absence of optimal planning and full heuristic behavior. The derived results point to a richness of outcomes that can only be unveiled once the simple dynamic growth setup is expanded to include different consumption-savings profiles.

Keywords: Heterogeneous agents; Consumption heuristics; Intertemporal preferences; Hand-to-mouth consumers; Rule-of-thumb savers (search for similar items in EconPapers)
JEL-codes: C61 D15 E21 O41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11403-020-00292-4

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