Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior?
Autor(a) principal: | |
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Data de Publicação: | 2009 |
Outros Autores: | |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Institucional do FGV (FGV Repositório Digital) |
Texto Completo: | http://hdl.handle.net/10438/2165 |
Resumo: | Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0.956 to 0.969 while the relative risk-aversion coefficient is precisely estimated ranging from 0.829 to 1.126. There is no evidence of rejection in over-identifying-restriction tests. |
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Gomes, Fábio Augusto ReisIssler, João VictorEscolas::EPGEFGV2009-02-15T09:15:41Z2010-09-23T18:58:07Z2009-02-15T09:15:41Z2010-09-23T18:58:07Z2009-02-150104-8910http://hdl.handle.net/10438/2165Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0.956 to 0.969 while the relative risk-aversion coefficient is precisely estimated ranging from 0.829 to 1.126. There is no evidence of rejection in over-identifying-restriction tests.CNPq, CAPES, PRONEX e FAPERJengFundação Getulio Vargas. Escola de Pós-graduação em EconomiaEnsaios Econômicos;682Intertemporal substitutionOptimal consumptionAggregate after-tax capital rental rateEuler-equation aggregationConsumption rule-of-thumbEconomiaEconomiaModelos econométricosTesting the optimality of aggregate consumption decisions: is there rule-of-thumb behavior?info:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articlereponame:Repositório Institucional do FGV (FGV Repositório Digital)instname:Fundação Getulio Vargas (FGV)instacron:FGVinfo:eu-repo/semantics/openAccessTHUMBNAILGomes-Issler_WP.pdf.jpgGomes-Issler_WP.pdf.jpgGenerated Thumbnailimage/jpeg4255https://repositorio.fgv.br/bitstreams/3786617e-af33-4bfa-85f3-d3f0f7bba5fb/downloada89ac68775c9341b580221bbf15f17f5MD59TEXTGomes-Issler_WP.pdf.txtGomes-Issler_WP.pdf.txtExtracted texttext/plain67632https://repositorio.fgv.br/bitstreams/7a5dd2fd-c52d-4df0-9284-a5ebf1820a41/download58409a0996ee3e98d5480c8985f2a376MD58ORIGINALGomes-Issler_WP.pdfapplication/pdf380776https://repositorio.fgv.br/bitstreams/4b4741f3-19dc-4d95-ac00-a1fdeaee1b4f/download9424e30ad524a84966b404a1f2c420c2MD5310438/21652023-11-09 20:58:59.334open.accessoai:repositorio.fgv.br:10438/2165https://repositorio.fgv.brRepositório InstitucionalPRIhttp://bibliotecadigital.fgv.br/dspace-oai/requestopendoar:39742023-11-09T20:58:59Repositório Institucional do FGV (FGV Repositório Digital) - Fundação Getulio Vargas (FGV)false |
dc.title.eng.fl_str_mv |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
title |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
spellingShingle |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? Gomes, Fábio Augusto Reis Intertemporal substitution Optimal consumption Aggregate after-tax capital rental rate Euler-equation aggregation Consumption rule-of-thumb Economia Economia Modelos econométricos |
title_short |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
title_full |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
title_fullStr |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
title_full_unstemmed |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
title_sort |
Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior? |
author |
Gomes, Fábio Augusto Reis |
author_facet |
Gomes, Fábio Augusto Reis Issler, João Victor |
author_role |
author |
author2 |
Issler, João Victor |
author2_role |
author |
dc.contributor.unidadefgv.por.fl_str_mv |
Escolas::EPGE |
dc.contributor.affiliation.none.fl_str_mv |
FGV |
dc.contributor.author.fl_str_mv |
Gomes, Fábio Augusto Reis Issler, João Victor |
dc.subject.eng.fl_str_mv |
Intertemporal substitution Optimal consumption |
topic |
Intertemporal substitution Optimal consumption Aggregate after-tax capital rental rate Euler-equation aggregation Consumption rule-of-thumb Economia Economia Modelos econométricos |
dc.subject.por.fl_str_mv |
Aggregate after-tax capital rental rate Euler-equation aggregation Consumption rule-of-thumb |
dc.subject.area.por.fl_str_mv |
Economia |
dc.subject.bibliodata.por.fl_str_mv |
Economia Modelos econométricos |
description |
Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0.956 to 0.969 while the relative risk-aversion coefficient is precisely estimated ranging from 0.829 to 1.126. There is no evidence of rejection in over-identifying-restriction tests. |
publishDate |
2009 |
dc.date.accessioned.fl_str_mv |
2009-02-15T09:15:41Z 2010-09-23T18:58:07Z |
dc.date.available.fl_str_mv |
2009-02-15T09:15:41Z 2010-09-23T18:58:07Z |
dc.date.issued.fl_str_mv |
2009-02-15 |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
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info:eu-repo/semantics/article |
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article |
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http://hdl.handle.net/10438/2165 |
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0104-8910 |
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Ensaios Econômicos;682 |
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openAccess |
dc.publisher.none.fl_str_mv |
Fundação Getulio Vargas. Escola de Pós-graduação em Economia |
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Fundação Getulio Vargas. Escola de Pós-graduação em Economia |
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