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The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income … permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent … stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its …
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A number of empirical studies document that marginal cost shocks are not fully passed through to prices at the firm level and that prices are substantially less volatile than costs. We show that in the relative-deep-habits model of Ravn, Schmitt-Grohe, and Uribe (2006), firm-specific marginal...
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