Transaction Cost and Consumption
The marginal propensity to consume (MPC) out of unanticipated income shocks tends to decrease as the size of the shocks becomes larger. The relationship cannot be explained by the Rational Expectation-Permanent Income Hypothesis(RE-PIH). Moreover,the estimated MPC out of small income shocks is well above what the REPIH predicts. In addition,previous studies have shown that consumption responds to small anticipated income changes,but not to large ones. This paper argues that these ˉndings can be reconciled within a RE-PIH framework that includes a cash-in-advance constraint. In the model,the representative agent is assumed to be fully rational with perfect information and is able to borrow against future income. The agent can hold cash and interest- bearing assets. The agent has to pay a ˉxed transaction cost to transfer wealth between cash and assets. I show that the agent follows an s-S rule with respect to cash holdings in making wealth-transfer decisions. The MPC within the no-transfer band is higher than that out of the band. It can be lower than or exactly equal to 1. The model also predicts that agents smooth consumption in response to news of large future income changes but not to small ones. Furthermore the model sheds light on the demand for liquid assets and the equity premium puzzle.
Geng Li
Federal Reserve Board
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）