Article: Consumption dynamics under information processing constraints

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Title	Consumption dynamics under information processing constraints
Authors	Luo, Y1
Keywords	Aggregation Consumption and savings behavior Rational inattention Short-run and long-run impacts
Issue Date	2008
Publisher	Academic 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?] DOI: http://dx.doi.org/10.1016/j.red.2007.07.003
Abstract	This 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.
ISSN	1094-2025 2011 Impact Factor: 1.358 2011 SCImago Journal Rankings: 0.051
DOI	http://dx.doi.org/10.1016/j.red.2007.07.003
ISI Accession Number ID	WOS:000255102600007
References	References in Scopus

DC Field	Value
dc.contributor.author	Luo, Y
dc.date.accessioned	2010-09-06T09:07:00Z
dc.date.available	2010-09-06T09:07:00Z
dc.date.issued	2008
dc.description.abstract	This 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.
dc.description.nature	Link_to_subscribed_fulltext
dc.identifier.citation	Review Of Economic Dynamics, 2008, v. 11 n. 2, p. 366-385 [How to Cite?] DOI: http://dx.doi.org/10.1016/j.red.2007.07.003
dc.identifier.doi	http://dx.doi.org/10.1016/j.red.2007.07.003
dc.identifier.epage	385
dc.identifier.hkuros	148613
dc.identifier.isi	WOS:000255102600007
dc.identifier.issn	1094-2025 2011 Impact Factor: 1.358 2011 SCImago Journal Rankings: 0.051
dc.identifier.issue	2
dc.identifier.openurl
dc.identifier.scopus	eid_2-s2.0-40149101860
dc.identifier.spage	366
dc.identifier.uri	http://hdl.handle.net/10722/85597
dc.identifier.volume	11
dc.language	eng
dc.publisher	Academic Press. The Journal's web site is located at http://www.elsevier.com/locate/red
dc.publisher.place	United States
dc.relation.ispartof	Review of Economic Dynamics
dc.relation.references	References in Scopus
dc.subject	Aggregation
dc.subject	Consumption and savings behavior
dc.subject	Rational inattention
dc.subject	Short-run and long-run impacts
dc.title	Consumption dynamics under information processing constraints
dc.type	Article

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The University of Hong Kong

Article: Consumption dynamics under information processing constraints

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