Near-rationality, heterogeneity and aggregate consumption.

From: Journal of Money, Credit & Banking | Date: February 1, 1995| Author: | Copyright information

The simple permanent-income model provides a good description of the medium-long run behavior of aggregate non-durables consumption, but fails to describe its short run behavior. In this paper I present a non-representative agent model with near-rational microeconomic units a la Akerlof-Yellen that simultaneously explains the observed excess smoothness of consumption to wealth innovations and the excess sensitivity of consumption to lagged income changes. This model also explains conditional asymmetries found in the data: in good times, consumers respond more promptly to positive than ...

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