Speaker:Wang Gaowang, Central University of Finance and Economics
Date:March 6, 2014
Time:3:30 p.m. - 4:30 p.m.
Location:Room 401, Run Run Shaw Science Building, Central Campus
Sponsor:Center for Economic Research of Shandong University
Abstract:
This paper explores how rational inattention (RI) affects aggregate saving and the interest rate in two general equilibrium models with the CARA-Gaussian Specification: one is a Huggett-type economy in which equilibrium aggregate saving is zero and the other is a Caballero-type overlapping generations model with recursive utility in which equilibrium aggregate saving is positive. In the first model, we show that RI due to limited information processing ability increases individual precautionary savings and reduces general equilibrium interest rates. In addition, we show that this model is observationally equivalent to the standard Hall-type permanent income hypothesis model with higher discount factors. In the second economy, we show that RI reduces the steady state equilibrium aggregate wealth via interacting with both the coefficient of absolute risk aversion and the elasticity of intertemporal substitution.
Keywords:Rational Inattention; Permanent Income Hypothesis; Aggregate Saving, General Equilibrium
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