Sticky Information Diffusion and the Inertial Behavior of Durables Consumption

41 Pages Posted: 19 Jul 2010

See all articles by Yulei Luo

Yulei Luo

University of Hong Kong

Eric R. Young

University of Virginia

Date Written: October 28, 2009

Abstract

This paper studies the dynamics of durable and nondurable consumption under two alternative assumptions about information updating by households – rational inattention and sticky expectations. We first show that the two types of sticky information diffusion can help generate strong excess smoothness in durables consumption. We then find that sticky expectations due to a fixed cost does a better job of reproducing the infrequent adjustments of durables consumption at the individual level and the slow adjustments at the aggregate level. Finally, we show that finite information-processing capacity can by itself lead to infrequent adjustments even if there is no adjustment cost.

Keywords: Durability, Rational Inattention, Infrequent Adjustments, Consumption Stickiness

JEL Classification: C61, D81, E21

Suggested Citation

Luo, Yulei and Young, Eric R., Sticky Information Diffusion and the Inertial Behavior of Durables Consumption (October 28, 2009). Available at SSRN: https://ssrn.com/abstract=1645058 or http://dx.doi.org/10.2139/ssrn.1645058

Yulei Luo (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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