Near-Rationality, Heterogeneity and Aggregate Consumption

28 Pages Posted: 23 Sep 2000 Last revised: 16 Jul 2010

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1992

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.

Suggested Citation

Caballero, Ricardo J., Near-Rationality, Heterogeneity and Aggregate Consumption (March 1992). NBER Working Paper No. w4035. Available at SSRN: https://ssrn.com/abstract=238166

Ricardo J. Caballero (Contact Author)

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