Survey_Fuhrer_1997

Abstract

"The model derives from the standard consumer's problem. The consumer chooses a planned stream of consumption, ct, to maximizeexpected utility, subject to the present discounted value of his lifetime assets, given an initial asset stock A0. Consumption, ct, is defined as the log of chain-weighted, per capita, nondurables and services consumption expenditures. Income is the log of chainweighted, per capita, disposable personal income. The real interest rate is the model-consistent ex ante real interest rate, computed as the weighted discounted average of future short-term real interest rates, where the weight in periodt+iis 1+--~ 1 1+--~, d i and the parameter d indexes the duration of the real rate, measured in quarters. I estimate the parameter d jointly with the utility parameters 5 and a and the share of rule-of-thumbers A. All data are quarterly. As indicated, the real rate p will be derived from model-consistent forecasts of short-term real rates. To model the short-term nominal rate and inflation, I use a simple reaction function as described in Section 1.3 and the contracting specification of Section 1.1. I assume that disposable income may be well approximated as the sum of a segmented trend y~, with breakpoint in 1973, and a deviation from trend, Yr. Because the consumption specification represents the first step in building up an articulated IS-curve, I do not include the Fuhrer-Moore IS curve in the model at this stage. As a result, nothing in this simple version of the model determines the deviation of disposable income about its trend. I employ a reduced-form forecasting equation for the income ""gap"" that makes the gap a function of its own lags, as well as lags of inflation and the short rate."