The Unassuming Economist

From The Grumpy Economist:

“I wrote this essay on Bob Hall and Consumption (link goes to pdf on my webpage) for the conference in honor of Bob Hall at Hoover, November 22. It turned into a more extended history of some trends in macroeconomics, which any student of macroeconomics might find useful. Why we do what we do is often obscure. If this post exceeds your email limit, finish on the website at grumpy-economist.com

Bob Hall and Consumption1

I’m going to cover just two of Bob Hall’s many pathbreaking papers, “Stochastic Implications of the Life Cycle–Permanent Income Hypothesis,” Hall (1978), and “Intertemporal Substitution in Consumption,” Hall (1988), both in the Journal of Political Economy. Along the way, this turns in to a brief history of the emergence of modern macroeconomics, and one of its central unsolved problems, intertemporal substitution.

I titled my remarks at the conference, “Consuming Hall at Chicago.” I think you know Hall has many fans at Stanford, but you might not know just how popular Bob was at Chicago. Pretty much everything I write today I learned from Bob Lucas and Lars Hansen at Chicago in the 1980s.

1 A Simple Idea

As usual for Bob, it all starts with a simple clever idea. In asset pricing, price is present value of dividends, so price follows a random walk. In the permanent income model, consumption is proportional to the present value of income. So consumption should follow a random walk too. Why not test that hypothesis just as asset pricers were doing in the 1970s, by running regressions,”

Continue reading here.