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Consumption Heterogeneity over the Business Cycle

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  • Giacomo de Giorgi
  • Luca Gambetti

Abstract

We study consumption heterogeneity over the business cycle. Using household panel data from 1984 to 2010 in the US we find that the welfare cost of the business cycle is non-negligible, once agents heterogeneity is taken into account, and sums to about 1% of yearly consumption. This is due to the structure of comovements between the different parts of the consumption distribution, in particular the tails are highly volatile and negatively related to each other. We also find that business cycle fluctuations originating from exogenous financial shocks only hit the top end of the consumption distribution and therefore reduce consumption inequality.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 646.

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Date of creation: Jun 2012
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Handle: RePEc:bge:wpaper:646

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Keywords: Consumption; Heterogeneity; Aggregate Shocks; Structural Factor Model; FAVAR;

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References

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  1. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1887-1921, December.
  2. Battistin, Erich & Padula, Mario, 2010. "Survey Instruments and the Reports of Consumption Expenditures: Evidence from the Consumer Expenditure Surveys," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8051, C.E.P.R. Discussion Papers.
  3. Fatih Guvenen, 2007. "Do Stockholders Share Risk More Effectively than Nonstockholders?," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 275-288, May.
  4. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative macroeconomics with heterogeneous households," Staff Report, Federal Reserve Bank of Minneapolis 420, Federal Reserve Bank of Minneapolis.
  5. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2007. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 008, University of Modena and Reggio E., Dept. of Economics.
  6. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  7. Forni, Mario & Gambetti, Luca, 2008. "The Dynamic Effects of Monetary Policy: A Structural Factor Model Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7098, C.E.P.R. Discussion Papers.
  8. Manuela Angelucci & Giacomo de Giorgi & Imran Rasul & Marcos A. Rangel, 2010. "Insurance and Investment within Family Networks," Working Papers id:2649, eSocialSciences.
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Cited by:
  1. Giacomo de Giorgi & Luca Gambetti, 2012. "The Effects of Government Spending on the Distribution of Consumption," Working Papers 645, Barcelona Graduate School of Economics.

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