Consumption / Robert E. Hall, National Bureau of Economic Research.

Author
Hall, Robert E. (Robert Ernest), 1943- [Browse]
Format
Book
Language
English
Published/​Created
Cambridge, Massachusetts : National Bureau of Economic Research, 1988.
Description
1 online resource (30 pages).

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Subject(s)
Author
Series
Working paper series (National Bureau of Economic Research) ; number 2265. [More in this series]
Summary note
Macroeconomic research on consumption has been influenced profoundly by rational expectations. First, rational expectations together with the hypothesis of constant expected real interest rates implies that consumption should evolve as a random walk. Much of the research of the past decade has been devoted to testing the random walk hypothesis and to explaining its failure. Three branches of the literature have developed. The first relies on the durability of consumption to explain deviations from the random walk property. The second invokes liquidity constraints which block consumers from the credit market transactions needed to make consumption follow a random walk when income fluctuates up and down. The third branch dispenses with the assumption that expected real interest rates are constant. It attempts to explain deviations from the random walk in terms of intertemporal substitution.
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