TY  - JOUR
AU  - Caballero,Ricardo J.
TI  - Near-Rationality, Heterogeneity and Aggregate Consumption
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4035
PY  - 1992
Y2  - March 1992
UR  - http://www.nber.org/papers/w4035
L1  - http://www.nber.org/papers/w4035.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu
AB  - The simple permanent income model provides a good description of the medium-long run behavior of aggregate nondurables consumption, while it fails in describing its short run behavior. In this paper I present a non-representative agent model with near-rational microeconomic units that simultaneously explains the observed excess smoothness of consumption to wealth innovations, the excess sensitivity of consumption to lagged income changes, as well as small conditional asymmetries found in the data. In spite of the presence of large non-diversifiable idiosyncratic uncertainty, the estimated dollar equivalent utility cost of the micreconomic near-rational strategy required to explain the aggregate facts is only 0.26y percent of consumption per year, where y is the coefficient of relative risk aversion.
ER  -