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Ambiguous information, permanent income, and consumption fluctuations

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  • Yoo, Donghoon

Abstract

This paper studies asymmetric responses in consumption, where the asymmetries are endogenously generated by agents’ preferences and incomplete knowledge about information quality. Agents form expectations about the future based on incomplete information, which is assumed to be ambiguous, and these future expectations, distorted by ambiguity, affect spending asymmetrically. With a noisy signal of uncertain quality, consumption features asymmetric responses: the absolute size of the responses depends on whether the signal delivers good or bad news. I estimate the model on the data for G7 countries by maximum likelihood, and the estimation results suggest that the ambiguity mechanism plays a modest role in driving observed skewness in the data.

Suggested Citation

  • Yoo, Donghoon, 2019. "Ambiguous information, permanent income, and consumption fluctuations," European Economic Review, Elsevier, vol. 119(C), pages 79-96.
    • Handle: RePEc:eee:eecrev:v:119:y:2019:i:c:p:79-96
    DOI: 10.1016/j.euroecorev.2019.07.001
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    Cited by:

    1. Corrado, Luisa & Silgado-Gómez, Edgar & Yoo, Donghoon & Waldmann, Robert, 2022. "Ambiguous economic news and heterogeneity: What explains asymmetric consumption responses?," Journal of Macroeconomics, Elsevier, vol. 72(C).
    2. Cosmin L. Ilut & Martin Schneider, 2022. "Modeling Uncertainty as Ambiguity: a Review," NBER Working Papers 29915, National Bureau of Economic Research, Inc.
    3. Jean-Paul L’Huillier & Robert Waldmann & Donghoon Yoo, 2021. "Confidence, Fundamentals, and Consumption," ISER Discussion Paper 1135, Institute of Social and Economic Research, Osaka University.
    4. Jean-Paul L’Huillier & Robert Waldmann & Donghoon Yoo, 2021. "What Is Consumer Confidence?," ISER Discussion Paper 1135r, Institute of Social and Economic Research, Osaka University, revised Dec 2022.

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    More about this item

    Keywords

    Ambiguity; Noisy information; Permanent income hypothesis;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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