NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives

John H. Cochrane

NBER Working Paper No. 2730 (Also Reprint No. r1306)
Issued in October 1988
NBER Program(s):   EFG

This paper presents calculations of the utility cost to consumers of following alternative decision rules in the environments specified by tests of the intertemporal allocation of consumption on aggregate data. The alternatives include excess and inadequate sensitivity to income and interest rate changes and ignoring information. The calculations find that the costs of large deviations from the optimal decision rule--consumption equal to current income, for example--are on the order of l cent to $1 per quarter. They are interpreted to suggest that the theory does not make predictions that are robust to small inaccuracies of modeling, including small costs of transactions and information, and that those small costs can account for rejections of the theory as it is applied to aggregate US data.

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Document Object Identifier (DOI): 10.3386/w2730

Published: The American Economic Review, Vol. 79, No. 3, pp. 319-337, (June 1989).

 
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