1,721,042 research outputs found
A re-examination of the excess smoothness puzzle when consumers estimate the income process
No full textThe excess smoothness puzzle is explored using a simple version of the permanent income hypothesis. The new feature is that consumers do not know the observed data-generating process for income. Instead they estimate the income process every period using the past income data and update their income forecasts as new data arrive. Two scenarios are examined: first, where the income has a linear deterministic trend and second, where the income has a constant trend. There is a misspecification bias in the estimate of the marginal propensity to consume (MPC). This bias is of second-order importance in the first scenario while it is of first-order importance in the second. We conclude that the second scenario, which may be relevant for less developed countries, may offer a potential solution to the excess smoothness puzzle
It's not selfish
No full textEvery day we make decisions. Traditional rationalist economists say that we make the decision in which our expected value or expected receipt is the highest
An Adjustment Cost Model of Asset Pricing.
No full textAn intertemporal asset-pricing model is constructed incorporating an explicit adjustment-cost technology. The capital stock can be altered by investment, but there are adjustment costs whi ch lower the marginal return of investment. In a model involving an i nfinitely-lived representative agent, it is shown how changes in adju stment costs influence asset prices, the term structure of real inter est rates, and risk premia. The results suggest that adjustment cost, by causing an intertemporal consumption substitution, raises the pri ces of risky stocks and risk premia and reduces long-term real intere st rates. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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