When central banks announce cuts to future interest rates, the expected costs of government debt service decrease, generating additional resources in future budgets. This paper demonstrates that if the rational-expectations assumption is dropped, fiscal authority can exploit those gains by...

This paper examines the theoretical foundations of precautionary wealth accumulation in a multi-period model where consumers face uninsurable earnings risk and borrowing constraints. We begin by characterizing the consumption function of individual consumers. We show that consumption function is...

In this paper we provide evidence that there are statistical and economically meaningful differences in terms of attitudes towards risk at the aggregate level across countries, as captured by country-specific estimations of the coefficient of relative risk aversion. This has important...

What matters to economic decision-making is whether the economy has become more or less predictable. People and businesses use information around them to form judgements about what might happen in the future. The rise in uncertainty might be associated with increased concern about extreme...

This paper analyses a two-period model in which a consumer faces a future income risk but is uncertain about its probability distribution. We derive three sets of sufficient conditions under which a consumer with generalised recursive smooth ambiguity (GRSA) preferences will save more under...

A household’s preferences are usually assumed not to vary temporally or depending on the objects to which they are applied, but this assumption is often inconsistent with empirical estimates, for example, with the time-inconsistency problem of the time preference rate and the equity-premium...

A disturbing feature of the conventional objective function for intertemporal decisions under uncertainty is that the agent's attitudes toward intertemporal substitution and risk aversion are entangled. This paper shows that, in contrast to common perception, the two attitudes can be completely...

This paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion (SID) due to noisy observations and learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of...

In this paper we examine implications of model uncertainty due to robustness (RB) for consumption and saving and the market price of uncertainty under limited information-processing capacity (rational inattention or RI). We first solve the robust permanent income models with inattentive...

This paper analyses the optimal saving behaviour of a risk-averse and prudent consumer who faces two sources of income risk: risk as described by a given probability distribution and risk in the distribution itself. The latter is captured by the randomness in the parameters underlying the...