Learning about Consumption Dynamics

71 Pages Posted: 17 Mar 2010 Last revised: 29 Jan 2016

See all articles by Michael S. Johannes

Michael S. Johannes

Columbia Business School - Finance and Economics

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management

Yiqun Mou

Columbia Business School

Date Written: September 15, 2014

Abstract

This paper characterizes U.S. consumption dynamics from the perspective of a Bayesian agent who does not know the underlying model structure but learns over time from macroeconomic data. Realistic, high-dimensional macroeconomic learning problems, which entail parameter, model, and state learning, generate substantially different subjective beliefs about consumption dynamics compared to the standard, full-information rational expectations benchmark. Beliefs about long-run dynamics are volatile, with counter-cyclical conditional volatility, and drift over time. Embedding these beliefs in a standard asset pricing model significantly improves the model's ability to match the stylized facts, as well as the sample path of the market price-dividend ratio.

JEL Classification: G12

Suggested Citation

Johannes, Michael Slater and Lochstoer, Lars A. and Mou, Yiqun, Learning about Consumption Dynamics (September 15, 2014). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1573278 or http://dx.doi.org/10.2139/ssrn.1573278

Michael Slater Johannes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Lars A. Lochstoer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Yiqun Mou

Columbia Business School ( email )

420 West 118th Street
New York, NY 10027
United States

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