Parameter Uncertainty and Consumption Volatility in General Equilibrium

Professor Luo, Yulei   (Principal Investigator (PI))

Dr Nie Jun   (Co-Investigator)

Professor Young Eric   (Co-Investigator)

30

2017-07-15

189158

Parameter Uncertainty and Consumption Volatility in General Equilibrium

Consumption Volatility, General Equilibrium, Ignorance, Parameter Uncertainty

Economics

Business Studies (B)

17500117

General Research Fund (GRF)

2017

Completed

1 To construct a tractable continuous-time CARA-Gaussian heterogeneous-agent equilibrium model to link two research lines: (i) parameter uncertainty and learning and (ii) the equilibrium household consumption-income dynamics. 2 To solve the model explicitly and explore how parameter uncertainty and learning affects the real rate of interest and the cross-sectional distributions of individual consumption and income in general equilibrium in the presence of uninsurable labor income. 3 To estimate the income process with stochastic mean using the US panel data on household consumption and income, and to quantitatively evaluate how parameter learning has the potential to better explain the low real interest rate and high consumption-income volatility we observed in the US economy. 4 To compute the welfare costs of parameter uncertainty using the plausibly estimated and calibrated parameter values. 5 To extend the benchmark model to allow for model misspecifications proposed by Hansen and Sargent (2007), and study the relative importance of two types of uncertainty: (i) uncertainty over the key structural parameter and (ii) uncertainty over the model specification itself.