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The Time‐Varying Volatility of Earnings and Aggregate Consumption Growth

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  • LORENZO POZZI

Abstract

Time‐varying specifications for the conditional variance of earnings of U.S. households are estimated with micro data over the period 1968–92. The cross‐sectional mean of the estimated time‐varying uncertainty of individual households has a significant impact on aggregate consumption growth. As such, aggregate precautionary savings may be more important than what is suggested by the results of estimating standard regression equations for aggregate consumption growth that incorporate only lagged income growth and the real interest rate. The estimation of a buffer stock consumption model with time‐varying earnings uncertainty suggests that the precautionary savings motive is cyclical and has become less important in the 1980s.

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  • Lorenzo Pozzi, 2015. "The Time‐Varying Volatility of Earnings and Aggregate Consumption Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 551-580, June.
    • Handle: RePEc:wly:jmoncb:v:47:y:2015:i:4:p:551-580
    DOI: 10.1111/jmcb.12221
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