The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives / John H. Cochrane.

Format:

Book

Author/Creator:

Cochrane, John H.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2730.

NBER working paper series no. w2730

Language:

English

Subjects (All):

Consumption (Economics)--Mathematical models.

Consumption (Economics).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1988.

Cambridge, Massachusetts : National Bureau of Economic Research, 1988.

Summary:

This paper presents calculations of the utility cost to consumers of following alternative decision rules in the environments specified by tests of the intertemporal allocation of consumption on aggregate data. The alternatives include excess and inadequate sensitivity to income and interest rate changes and ignoring information. The calculations find that the costs of large deviations from the optimal decision rule--consumption equal to current income, for example--are on the order of l cent to $1 per quarter. They are interpreted to suggest that the theory does not make predictions that are robust to small inaccuracies of modeling, including small costs of transactions and information, and that those small costs can account for rejections of the theory as it is applied to aggregate US data.

Notes:

Print version record

October 1988.