Consumption: Beyond Certainty Equivalence

12 Pages Posted: 24 Jan 2007

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: 1988

Abstract

This paper discusses the recent research on the consumption function that has attempted to relax the assumption of certainty equivalence. While there remain many open questions, both theoretical and empirical, it is clear that the assumption of certainty equivalence can be misleading. Under more plausible specifications of preferences toward risk, uncertainty lowers the level of consumption, increases the expected rate of growth of consumption, and increases the response of consumption to news about income. Moreover, changes in the amount of uncertainty are a potentially important source of fluctuations in consumption.

Suggested Citation

Blanchard, Olivier J. and Mankiw, N. Gregory, Consumption: Beyond Certainty Equivalence (1988). NBER Working Paper No. w2496. Available at SSRN: https://ssrn.com/abstract=349262

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

N. Gregory Mankiw

Harvard University - Department of Economics ( email )

Littauer Center
Room 223
Cambridge, MA 02138
United States
617-495-4301 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
55
Abstract Views
664
rank
375,396
PlumX Metrics