Journal of Monetary Economics2013-09-05 2:57 AM

Consumption smoothing and portfolio rebalancing: The effects of adjustment costs

Abstract A household's response to income and return shocks depends on the costs of portfolio adjustment. In particular, the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non-convex portfolio adjustment costs. Suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs. Due to these portfolio adjustment costs, the household demands both stocks and bonds. A household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently. Using the estimated preference parameters and portfolio adjustment costs, the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing.

KEYWORDS

SHARE & LIKE

COMMENTS

ABOUT THE AUTHOR

Journal of Monetary Economics

The Journal of Monetary Economics is a peer-reviewed academic journal covering research on macroeconomics and monetary economics. It is published by Elsevier and was established in October 1973 by Karl Brunner and Charles I. Plosser.

0 Following 0 Fans 0 Projects 39 Articles

SIMILAR ARTICLES

Highlights • Friedman rule assumes a source of finance: lump-sum taxation. • Lump-sum taxes are like a debt obligation. • If people are permitted to

Read More

Highlights • We link the boom that preceded the "Great Recession" and the eventual bust together. • Expected gains from financial innovations may hav

Read More

Highlights • Endogenous investment booms and busts arise in a rational expectations framework. • Aggregate distortions exist despite the design of op

Read More

Highlights • An economy where defaulters lose collateral and exclusion occurs probabilistically. • A higher exclusion probability implies better enfo

Read More

Highlights • The regional availability of bond and bank financing induces debt inflexibility. • Inflexibility limits the firm's ability to replace ba

Read More

Highlights • We study economic growth through eliminating rather than augmenting non-reproducible factors. • We obtain the balanced growth path and c

Read More

Highlights • This paper shows that investor sentiment helps account for the forward premium puzzle. • The same mechanism helps account for other styl

Read More

Highlights • Macro model with banks. • Bank runs and endogenous bank capital. • Risk taking channel. • Endogenous risk formation. • Optimal an

Read More

Highlights • Government investment in public capital forecasts high risk premiums. • Result is in contrast with negative link between private invest

Read More

Highlights • We propose two system-based identification-robust methods for DSGE models. • Valid under weak identification and auxiliary assumptions

Read More