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Article: Consumption dynamics under information processing constraints

TitleConsumption dynamics under information processing constraints
Authors
KeywordsAggregation
Consumption and savings behavior
Rational inattention
Short-run and long-run impacts
Issue Date2008
PublisherAcademic Press. The Journal's web site is located at http://www.elsevier.com/locate/red
Citation
Review Of Economic Dynamics, 2008, v. 11 n. 2, p. 366-385 How to Cite?
AbstractThis paper studies how "rational inattention" (RI)-a type of information processing constraint proposed by Sims [Sims, C.A., 2003. Implications of rational inattention, Journal of Monetary Economics 50 (3), 665-690]-affects the joint dynamics of consumption and income in a permanent income model with general income processes. Specifically, I propose an analytical approach to solve the multivariate permanent income model with RI and examine its implications for optimal consumption, saving, and welfare. It is shown that RI can affect the relative volatility of consumption and provide an endogenous propagation mechanism that disentangles the short-run and long-run responses of consumption to exogenous income shocks. I also explore how aggregation reduces the impact of the RI-induced endogenous noise on consumption and thus increases the smoothness of aggregate consumption. Finally, I compare RI with four alternative hypotheses (habit formation, signal extraction, robustness, and inattentiveness) by examining their implications for the joint behavior of consumption and income. © 2007 Elsevier Inc. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85597
ISSN
2015 Impact Factor: 1.256
2015 SCImago Journal Rankings: 2.554
SSRN
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorLuo, Yen_HK
dc.date.accessioned2010-09-06T09:07:00Z-
dc.date.available2010-09-06T09:07:00Z-
dc.date.issued2008en_HK
dc.identifier.citationReview Of Economic Dynamics, 2008, v. 11 n. 2, p. 366-385en_HK
dc.identifier.issn1094-2025en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85597-
dc.description.abstractThis paper studies how "rational inattention" (RI)-a type of information processing constraint proposed by Sims [Sims, C.A., 2003. Implications of rational inattention, Journal of Monetary Economics 50 (3), 665-690]-affects the joint dynamics of consumption and income in a permanent income model with general income processes. Specifically, I propose an analytical approach to solve the multivariate permanent income model with RI and examine its implications for optimal consumption, saving, and welfare. It is shown that RI can affect the relative volatility of consumption and provide an endogenous propagation mechanism that disentangles the short-run and long-run responses of consumption to exogenous income shocks. I also explore how aggregation reduces the impact of the RI-induced endogenous noise on consumption and thus increases the smoothness of aggregate consumption. Finally, I compare RI with four alternative hypotheses (habit formation, signal extraction, robustness, and inattentiveness) by examining their implications for the joint behavior of consumption and income. © 2007 Elsevier Inc. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherAcademic Press. The Journal's web site is located at http://www.elsevier.com/locate/reden_HK
dc.relation.ispartofReview of Economic Dynamicsen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectAggregationen_HK
dc.subjectConsumption and savings behavioren_HK
dc.subjectRational inattentionen_HK
dc.subjectShort-run and long-run impactsen_HK
dc.titleConsumption dynamics under information processing constraintsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=1094-2025&volume=11&spage=20&epage=&date=2008&atitle=Consumption+Dynamics+Under+Information+Processing+Constraintsen_HK
dc.identifier.emailLuo, Y: yluo@econ.hku.hken_HK
dc.identifier.authorityLuo, Y=rp01083en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.red.2007.07.003en_HK
dc.identifier.scopuseid_2-s2.0-40149101860en_HK
dc.identifier.hkuros148613en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-40149101860&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume11en_HK
dc.identifier.issue2en_HK
dc.identifier.spage366en_HK
dc.identifier.epage385en_HK
dc.identifier.eissn1096-6099-
dc.identifier.isiWOS:000255102600007-
dc.publisher.placeUnited Statesen_HK
dc.identifier.ssrn909983-
dc.identifier.scopusauthoridLuo, Y=23767888300en_HK

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