Decision Frequency and Synchronization Across Agents: Implications for Aggregate Consumption and Equity Return

Abstract

This paper examines a model in which decisions are made at fixed intervals and are unsynchronized across agents. Agents choose nondurable consumption and portfolio composition and either or both can be chosen infrequently. A small utility cost is associated with both decisions being made infrequently indicating the plausibility of such behavior. Calibrating returns to the U.S. economy, less frequent but synchronized consumption decision-making delivers the low correlation of aggregate consumption growth and equity return found in the data. Introducing nonsynchroneity delivers the low volatility of aggregate U.S consumption as well. The incremental effect of less frequent and unsynchronized portfolio rebalancing on the joint behavior of aggregate consumption and return is always found to be negligible.