TY  - JOUR
AU  - Cochrane,John H.
TI  - The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2730
PY  - 1989
Y2  - November 1989
UR  - http://www.nber.org/papers/w2730
L1  - http://www.nber.org/papers/w2730.pdf
N1  - Author contact info:
John H. Cochrane
Booth School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@chicagobooth.edu
AB  - 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.
ER  -