IDEAS home Printed from https://ideas.repec.org/a/wly/japmet/v32y2017i4p819-840.html
   My bibliography  Save this article

On the Stability of the Excess Sensitivity of Aggregate Consumption Growth in the USA

Author

Listed:
  • Gerdie Everaert
  • Lorenzo Pozzi
  • Ruben Schoonackers

Abstract

This paper investigates the degree of time variation in the excess sensitivity of aggregate con- sumption growth to anticipated aggregate disposable income growth using quarterly US data over the period 1953-2014. Our empirical framework contains the possibility of stickiness in aggregate consumption growth and takes into account measurement error and time aggregation. Our empirical specification is cast into a Bayesian state space model and estimated using Markov Chain Monte Carlo (MCMC) methods. We use a Bayesian model selection approach to deal with the non-regular test for the null hypothesis of no time variation in the excess sensitivity parameter. Anticipated disposable income growth is calculated by incorporating an instrumental variables estimation approach into our MCMC algorithm. Our results suggest that the excess sensitivity parameter in the US is stable at around 0.24 over the entire sample period.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Gerdie Everaert & Lorenzo Pozzi & Ruben Schoonackers, 2017. "On the Stability of the Excess Sensitivity of Aggregate Consumption Growth in the USA," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(4), pages 819-840, June.
    • Handle: RePEc:wly:japmet:v:32:y:2017:i:4:p:819-840
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 183-206.
    3. Yunmi Kim & Chang‐Jin Kim, 2011. "Dealing with endogeneity in a time‐varying parameter model: joint estimation and two‐step estimation procedures," Econometrics Journal, Royal Economic Society, vol. 14(3), pages 487-497, October.
    4. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    5. Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-840, July.
    6. Christopher D. Carroll & Jiri Slacalek & Martin Sommer, 2011. "International Evidence on Sticky Consumption Growth," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1135-1145, November.
    7. John Muellbauer, 1988. "Habits, Rationality and Myopia in the Life Cycle Consumption Function," Annals of Economics and Statistics, GENES, issue 9, pages 47-70.
    8. Michael T. Kiley, 2010. "Habit Persistence, Nonseparability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 679-683, August.
    9. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    10. repec:fth:harver:1435 is not listed on IDEAS
    11. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    12. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-1273, November.
    13. Eric Girardin & Lucio Sarno & Mark P. Taylor, 2000. "Private consumption behaviour, liquidity constraints and financial deregulation in France: a nonlinear analysis," Empirical Economics, Springer, vol. 25(2), pages 351-368.
    14. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August.
    15. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
    16. Sydney C. Ludvigson & Alexander Michaelides, 2001. "Does Buffer-Stock Saving Explain the Smoothness and Excess Sensitivity of Consumption?," American Economic Review, American Economic Association, vol. 91(3), pages 631-647, June.
    17. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
    18. Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-136, February.
    19. Gert Peersman & Lorenzo Pozzi, 2008. "Business Cycle Fluctuations and Excess Sensitivity of Private Consumption," Economica, London School of Economics and Political Science, vol. 75(299), pages 514-523, August.
    20. Adrian Blundell-Wignall & Frank Browne & Stefano Cavaglia, 1991. "Financial Liberalisation and Consumption Behaviour," OECD Economics Department Working Papers 81, OECD Publishing.
    21. Frühwirth-Schnatter, Sylvia & Wagner, Helga, 2010. "Stochastic model specification search for Gaussian and partial non-Gaussian state space models," Journal of Econometrics, Elsevier, vol. 154(1), pages 85-100, January.
    22. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-279, July.
    23. Fumio Hayashi, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1083-1113.
    24. Sommer Martin, 2007. "Habit Formation and Aggregate Consumption Dynamics," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-25, August.
    25. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
    26. repec:adr:anecst:y:1988:i:9:p:03 is not listed on IDEAS
    27. Evans, Paul & Karras, Georgios, 1998. "Liquidity Constraints and the Substitutability between Private and Government Consumption: The Role of Military and Non-military Spending," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 203-214, April.
    28. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bhatt, Vipul & Kishor, Kundan & Marfatia, Hardik, 2017. "Estimating excess sensitivity and habit persistence in consumption using Greenbook forecast as an instrument," MPRA Paper 79748, University Library of Munich, Germany.
    2. Vipul Bhatt & N. Kundan Kishor & Hardik Marfatia, 2020. "Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(2), pages 257-284, April.
    3. Tore Dubbert, 2022. "Stochastic debt sustainability analysis using time-varying fiscal reaction functions. An agnostic approach to fiscal forecasting," CQE Working Papers 10422, Center for Quantitative Economics (CQE), University of Muenster.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    2. G. Everaert & L. Pozzi & -, 2010. "The Stickiness of Aggregate Consumption Growth in OECD Countries: A Panel Data Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/654, Ghent University, Faculty of Economics and Business Administration.
    3. Christopher D. Carroll & Jiri Slacalek & Martin Sommer, 2011. "International Evidence on Sticky Consumption Growth," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1135-1145, November.
    4. Daria Pignalosa, 2021. "The Euler Equation Approach: Critical Implications of Recent Developments in the Theory of Intertemporal Choice," Bulletin of Political Economy, Bulletin of Political Economy, vol. 15(1), pages 1-43, June.
    5. Christopher D. Carroll & Edmund Crawley & Jiri Slacalek & Kiichi Tokuoka & Matthew N. White, 2020. "Sticky Expectations and Consumption Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 40-76, July.
    6. Gert Peersman & Lorenzo Pozzi, 2008. "Business Cycle Fluctuations and Excess Sensitivity of Private Consumption," Economica, London School of Economics and Political Science, vol. 75(299), pages 514-523, August.
    7. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    8. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23, April.
    9. Tino Berger & Lorenzo Pozzi, 2023. "Cyclical consumption," Tinbergen Institute Discussion Papers 23-064/VI, Tinbergen Institute.
    10. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    11. Brunila, Anne, 1997. "Current income and private consumption : Saving decisions : Testing the finite horizon model," Research Discussion Papers 6/1997, Bank of Finland.
    12. repec:zbw:bofrdp:1997_006 is not listed on IDEAS
    13. L. Pozzi & F. Heylen & M. Dossche, 2002. "Government debt and the excess sensitivity of private consumption to current income: an empirical analysis for OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 02/155, Ghent University, Faculty of Economics and Business Administration.
    14. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
    15. Bhatt, Vipul & Kishor, Kundan & Marfatia, Hardik, 2017. "Estimating excess sensitivity and habit persistence in consumption using Greenbook forecast as an instrument," MPRA Paper 79748, University Library of Munich, Germany.
    16. Brunila, Anne, 1997. "Current income and private consumption: Saving decisions: Testing the finite horizon model," Bank of Finland Research Discussion Papers 6/1997, Bank of Finland.
    17. Reis, Ricardo, 2006. "Inattentive consumers," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1761-1800, November.
    18. David Demery & Nigel W. Duck, 2000. "Incomplete information and the time series behaviour of consumption," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(4), pages 355-366.
    19. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
    20. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    21. Shibata, Akihisa & Shintani, Mototsugu & Tsuruga, Takayuki, 2019. "Current account dynamics under information rigidity and imperfect capital mobility," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 153-176.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:japmet:v:32:y:2017:i:4:p:819-840. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0883-7252/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.