EconPapers    
Economics at your fingertips  
 

What We Don't Know Doesn't Hurt Us: Rational Inattention and the Permanent Income Hypothesis in General Equilibrium

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

No 280, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003, 2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that, under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete information are even smaller due to general equilibrium adjustments in interest rates.

Date: 2015
New Economics Papers: this item is included in nep-dge, nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2015/paper_280.pdf (application/pdf)

Related works:
Working Paper: What we don’t know doesn’t hurt us: rational inattention and the permanent income hypothesis in general equilibrium (2014) Downloads
Working Paper: What We Don't Know Doesn't Hurt Us: Rational Inattention and the Permanent Income Hypothesis in General Equilibrium (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:280

Access Statistics for this paper

More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2024-02-24
Handle: RePEc:red:sed015:280