68:
walk. Hall’s thoughts were: According to the permanent-income hypothesis, consumers deal with shifting income and try to smooth their consumption over time. At any given moment, a consumer selects their consumption based on their current expectations of their lifetime income. Throughout their life, consumers modify their consumption because they receive new information that makes them adjust their expectations. For example, a consumer receives an unexpected promotion at work and increases consumption. Whereas a consumer that is unexpectedly fired or demoted will decrease consumption. So changes in consumption reflect “surprises” about lifetime income. If consumers are optimally using all available information, then they should be surprised only by events that were completely unpredictable. Therefore, consumer’s changes in consumption should be unpredictable as well.
504:
effect when they change expectations.” Though the policy changes affect consumption only as much as they affect permanent income. Furthermore, only new information about policies can affect permanent income. This model implies that changes in consumption are unpredictable because consumers change their consumption only when they receive news about their lifetime resources.
67:
is correct, which in short says current income should be viewed as the sum of permanent income and transitory income and that consumption depends primarily on permanent income, and if consumers have rational expectations, then any changes in consumption should be unpredictable, i.e. follow a random
512:
Use of the Euler equations to estimate consumption appears to have advantages over traditional models. First, using Euler equations is simpler than conventional methods. This avoids the need to solve the consumer's optimization problem and is the most appealing element of using Euler equations to
503:
Robert Hall’s rational expectation approach to consumption creates implications for forecasting and analyzing economic policies. “If consumers obey the permanent-income hypothesis and have rational expectations, then only unexpected policy changes influence consumption. These policy changes take
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521:
Controversy has arisen over using Euler equations to model consumption. When applying the Euler consumption equations one has trouble explaining empirical data. Attempting to use the Euler equations to model consumption in the
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has led some economists to reject the random walk hypothesis. Some argue that this is due to the model's inability to uncover consumer preference variables such as the intertemporal elasticity of substitution.
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495:) suggests that consumption is a random walk because consumption is a function of only consumption from the previous period plus the innovation term.
47:
Hall introduced his famous random walk model of consumption in 1978. His approach is differentiated from earlier theories by the introduction of the
802:
Carroll, Christopher D. (2001). "Death to the Log-Linearized
Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)".
730:
Canzoneri, M. B.; Cumby, R. E.; Diba, B. T. (2007). "Euler equations and money market interest rates: A challenge for monetary policy models".
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63:
Robert Hall was the first to derive the effects of rational expectations for consumption. His theory states that if Milton
Friedman’s
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39:. Using Euler equations to model the random walk of consumption has become the dominant approach to modeling consumption.
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64:
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Molana, H. (1991). "The Time Series
Consumption Function: Error Correction, Random Walk and the Steady-State".
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571:(1978). "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence".
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into his consumption models and sets up the model so that consumers will maximize their utility.
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186:{\displaystyle E_{1}u'(c_{2})=\left({\frac {1+\delta }{1+r}}\right)u'(c_{1})}
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Chao, Hsiang-Ke (2007). "A Structure of the
Consumption Function".
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Consider a two-period case. The Euler equation for this model is
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Jaeger, Albert (1992). "Does
Consumption Take a Random Walk?".
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New
Keynesian economics § The science of monetary policy
35:. He created his consumption theory in response to the
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Applying the definition of expectations to equation (
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to modeling consumption. He incorporated the idea of
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Assuming that the utility function is quadratic and
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276:is the conditional expectation at time period 1.
639:(2016). "Robert Hall Random-Walk Hypothesis".
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439:{\displaystyle c_{2}=c_{1}+\epsilon _{2}}
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249:is the constant interest rate, and
489:is the innovation term. Equation (
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968:List of largest consumer markets
947:Random walk model of consumption
359:{\displaystyle E_{1}c_{2}=c_{1}}
608:Journal of Economic Methodology
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886:Final consumption expenditure
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732:Journal of Monetary Economics
482:{\displaystyle \epsilon _{2}}
656:"Estimating Euler Equations"
573:Journal of Political Economy
23:was introduced by economist
942:Permanent income hypothesis
660:Review of Economic Dynamics
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65:permanent income hypothesis
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952:Relative income hypothesis
932:Absolute income hypothesis
804:Advances in Macroeconomics
896:Intertemporal consumption
672:10.1016/j.red.2003.09.003
620:10.1080/13501780701394102
298:{\displaystyle \delta =r}
916:Conspicuous consumption
222:{\displaystyle \delta }
906:Autonomous consumption
901:Random walk hypothesis
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29:Euler numerical method
27:. This model uses the
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891:Instant gratification
542:Consumption smoothing
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269:{\displaystyle E_{1}}
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53:rational expectations
881:Consumption function
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21:model of consumption
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242:{\displaystyle r}
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817:10.1.1.71.4624
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775:(4): 607–614.
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666:(2): 405–435.
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641:Macroeconomics
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614:(2): 227–248.
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585:10.1086/260724
579:(6): 971–987.
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569:Hall, Robert
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499:Implications
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306:
305:, equation (
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62:
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17:
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989:Consumption
867:Consumption
738:(7): 1863.
681:10419/71591
33:consumption
25:Robert Hall
19:random walk
548:References
517:Criticisms
508:Advantages
43:Background
812:CiteSeerX
740:CiteSeerX
471:ϵ
428:ϵ
287:δ
217:δ
139:δ
31:to model
983:Category
925:Theories
531:See also
164:′
103:′
789:2109374
717:2233547
593:1840393
874:Topics
814:
787:
742:
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591:
462:where
209:where
59:Theory
961:Lists
810:(1).
785:JSTOR
713:JSTOR
589:JSTOR
72:Model
16:The
822:doi
777:doi
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705:doi
701:101
676:hdl
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