This paper studies asset allocation decisions in the presence of regime switching in asset returns. We find evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states - are required to capture the joint distribution of stock and bond returns. Optimal...

Is the risk aversion parameter in the simple intertemporal consumption CAPM “small” as in Hansen and Singleton (1982,1983), or is it that its reciprocal, the intertemporal elasticity of substitution, is small, as in Hall (1988)? This paper attributes the disparate estimates of this...

We propose a model that recognizes hierarchical goods and income inequality among households. The model demonstrates that growth is impacted not by inequality per se, but "absolute" income distribution or the level of poverty underlying the income distribution. Specifically, when a large...

An estimation of a life cycle cum rational expectations model that allows for uncertain future interest rates. The results show that the model is strongly rejected using post World War II U.S. data.

Deaton (1986) has noted that if income is a first-order autoregressive process in first differences, then a simple version of Friedman’s permanent income hypothesis (SPIH) implies that measured U.S. consumption is insufficiently sensitive to innovations in income. This paper argues that this...

Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the United States has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which...

We consider a production economy with a finite number of heterogeneous, infinitely lived consumers. We show that, if the economy is smooth enough, equilibria are locally unique for almost all endowments. We do so by converting the infinite-dimensional fixed point problem stated in terms of...

Measured aggregate U.S. consumption does not behave like a martingale. This paper develops and tests two variants of the permanent income model that are consistent with this fact. In both variants, we assume agents make decisions on a continuous time basis. According to the first variant, the...

The paper compares implications of three kinds of models of households’ consumption behavior: the basic permanent-income model, several models of liquidity-constrained households, and a model of an informationally-constrained efficient contract. These models are distinguished in terms of...