Near-Rationality, Heterogeneity and Aggregate Consumption

Ricardo Caballero ()

No 4035, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The simple permanent income model provides a good description of the medium-long run behavior of aggregate nondurables consumption, while it fails in describing its short run behavior. In this paper I present a non-representative agent model with near-rational microeconomic units that simultaneously explains the observed excess smoothness of consumption to wealth innovations, the excess sensitivity of consumption to lagged income changes, as well as small conditional asymmetries found in the data. In spite of the presence of large non-diversifiable idiosyncratic uncertainty, the estimated dollar equivalent utility cost of the micreconomic near-rational strategy required to explain the aggregate facts is only 0.26y percent of consumption per year, where y is the coefficient of relative risk aversion.

Date: 1992-03
Note: EFG
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Citations: View citations in EconPapers (5)

Published as Journal of Money, Credit and Banking, February 1995

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Journal Article: Near-Rationality, Heterogeneity, and Aggregate Consumption (1995)
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