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Hand-to-Mouth Consumers and Asset Prices

Abstract : Many consumers seem to lead a hand-to-mouth existence: they simply consume their current income. This may be the result of unsophisticated behavior (non-optimizing, or ‘rule-of-thumb’ consumers), or the reflection of an inability to trade in asset markets due to infinite transactions costs. The objective of this paper is to explore, in a very simple model, the implications for equilibrium asset prices of the presence of hand-to-mouth consumers. I will establish that allowing for the existence of hand-to-mouth consumers contributes, under plausible assumptions, to the resolution of the equity premium puzzle’ and of the riskfree rate puzzle. As a consequence, the same phenomenon - hand-to-mouth consumption - which Campbell and Mankiw (1989) have shown to be crucial to the description of the time-series behavior of aggregate consumption has the potential of explaining asset market data (...).
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Submitted on : Thursday, October 21, 2021 - 10:32:57 PM
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  • HAL Id : hal-03393469, version 1
  • SCIENCESPO : 2441/8604

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Philippe Weil. Hand-to-Mouth Consumers and Asset Prices. European Economic Review, Elsevier, 1992, 36 (2-3), pp.575 - 583. ⟨hal-03393469⟩

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