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Financial Crisis and Sticky Expectations

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Author Info

  • Saten Kumar

    (Department of Economics, Faculty of Business and Law, Auckland University of Technology)

  • Barrett Owen
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    Abstract

    We utilize the Kalman filter and instrumental variable methods to estimate consumption growth persistence for the U.S. Results show that prior to the financial crisis, the stickiness parameter beta was around 0.7. However, when the sample is extended until 2009.Q1, the estimates of beta declined to around 0.5. Extending the sample beyond 2009.Q1 show mild increase in beta. Our findings imply that during the crisis consumers' attentiveness to aggregate information has slightly increased, thereby reducing the persistence of aggregate consumption growth.

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    File URL: http://www.aut.ac.nz/__data/assets/pdf_file/0007/373336/Economics-WP-2013-05.pdf
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    Bibliographic Info

    Paper provided by Auckland University of Technology, Department of Economics in its series Working Papers with number 2013-05.

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    Length: 11 pages
    Date of creation: May 2013
    Date of revision:
    Handle: RePEc:aut:wpaper:201305

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    Keywords: financial crisis; Kalman filter; sticky expectations;

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    1. Christopher D. Carroll & Jiri Slacalek & Martin Sommer, 2008. "International Evidence On Sticky Consumption Growth," Economics Working Paper Archive 542, The Johns Hopkins University,Department of Economics.
    2. Gruber, Joseph W., 2004. "A present value test of habits and the current account," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1495-1507, October.
    3. 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 971-87, December.
    4. Sommer Martin, 2007. "Habit Formation and Aggregate Consumption Dynamics," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-25, August.
    5. Wayne E. Ferson & George M. Constantinides, 1992. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
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