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Information processing with recursive utility: some intriguing results

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abstract Much of the recent research in Macroeconomics and Finance uses
models where the representative agent has a recursive utility function. We study information processing with such preferences in a
simple endowment economy where consumption growth rates are autocorrelated. We show that for typical parameter values, positively
correlated consumption growth rates introduce a strong incentive for
ignoring information on the current state of the economy. We esti-
mate the model on postwar US data and find that the representative
consumer can achieve a utility gain equivalent to a 20 % increase in
lifetime consumption simply by not paying attention to the state of
the economy.
   
type working paper (English)
   
keywords Recursive preferences; Epstein-Zin preferences; Uncertainty aversion;
Information processing; Time inconsistency
   
date of appearance 2007
series title VWA Working Paper
publisher VWA
review not reviewed
   
citation Brevik, F. (2007). Information processing with recursive utility: some intriguing results. VWA Working Paper: VWA.