Lecture 10: October 4, 2004
More on Zeldes
Recall the regression in Zeldes (1989):
log (cit ) = 0i + 1 (AGE )i,t1 + 2 (Annual F ood N eeds)it + log (1+ rit )+ yi,t1 + it .
Zeldes is trying to test the LCH against a particular alternative hypot
We call consumption a Martingale under this denition. If
c is a random walk.
is iid white noise, then
To test, run the following OLS regression:
ct+1 = 0 + 1 ct + zt +
where zt is a vector of variables in the information set at time t. Under th
itself. Thus, in principal:
Vt (at ) =
Direct Ef f ect
Vt ct Vt t
ct at t at
I ndirect Ef f ects
Since V is a maximized value function, by the envelope theorem:
So we have:
Vt (at ) =
Direct Ef f e
Theorem: (Pratt 1964) For small enough multiplicative risks,
Where the term in parens is the Coecient of Relative Risk Aversion or RRA. Notice
that it varies with c and also has an extra term in the numerator.
Thus the coecient of
Economics 601: Macroeconomics
John Shea & Allan Drazen
Updated: January 1, 2005
Lecture 1: August 30, 2004
Consumption: Theory and Evidence
The classic Keynesian consumption function is of the form:
c = A + (M.P.C ) y.
Where c is co