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Rational Inattention and the Dynamics of Consumption and Wealth in General Equilibrium

Yulei Luo (), Jun Nie, Gaowang Wang () and Eric Young ()

MPRA Paper from University Library of Munich, Germany

Abstract: We use a recursive utility version of a basic Huggett (1993) model to study the cross-sectional dispersion of consumption and wealth (relative to income). The basic model implies too little dispersion compared to the data, whereas a one-parameter extension to include rational inattention (limited information processing) delivers a better fit to both facts in general equilibrium. In particular, intertemporal substitution plays an important role in determining the two key dispersion moments via affecting the degree of optimal attention in equilibrium. Alternative models that rely on habit formation, incomplete information about current income, or borrowing constraints are not consistent with the facts we document.

Keywords: Rational Inattention; General Equilibrium; Consumption and Wealth Volatility (search for similar items in EconPapers)
JEL-codes: E2 E21 (search for similar items in EconPapers)
Date: 2017-04-18
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
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https://mpra.ub.uni-muenchen.de/80045/1/MPRA_paper_80045.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/80997/1/MPRA_paper_80045.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/80998/1/MPRA_paper_80045.pdf revised version (application/pdf)

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Journal Article: Rational inattention and the dynamics of consumption and wealth in general equilibrium (2017) Downloads
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