Abstract
A two-period consumption model with an “ordinal certainty equivalent” preference is developed to characterize the comparative static effect of an increase in uncertainty of investment returns on the riskfree interest rate, the equity premium, expected growth of consumption, and the marginal propensity to consume out of current income. The results reconcile a few often reported consumption-related anomalies.
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Basu, P. Capital risk and consumption puzzles: A pedagogical note. Zeitschr. f. Nationalökonomie 60, 99–107 (1994). https://doi.org/10.1007/BF01228027
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DOI: https://doi.org/10.1007/BF01228027