Sequential optimization, front-loaded information, and U.S. consumption

Arbeitspapier

In an overlapping generations maximization framework with consumers, whose information on uncertain future income realizations is front loaded, a closed form aggregate consumption function with CRRA preferences is derived. To have a closed form solution we assume that consumers solve their intertemporal optimization problem sequentially. First they assess riskadjusted life-time wealth and then the optimal consumption path. The derived model captures precautionary saving, which is dependent on the human to non-human wealth ratio. On aggregate level, after accounting for habit formation, the model is able to explain both the short-run (e.g. the excess sensitivity and the excess smoothness puzzle) and long-run stylized facts of the U.S. consumption data.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 765

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Theory ; Consumer Economics: Empirical Analysis ; Asymmetric and Private Information; Mechanism Design ; Macroeconomics: Consumption; Saving; Wealth
• Subject: Consumption ; habit persistence ; Information ; Precautionary Saving ; Konsumtheorie ; Overlapping Generations ; Sparen ; Asymmetrische Information ; Risikoaversion ; Theorie ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Willman, Alpo
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/153199
• Last update: 10.03.2025, 11:43 AM CET