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Income uncertainty and aggregate consumption

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Author Info
L. Pozzi () (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))
Abstract

We investigate the relevance of aggregate and consumer-specific income uncertainty for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of income risk on consumption changes is decomposed into an aggregate and into a consumer-specific part. Empirically, aggregate risk is modelled through a GARCH process on aggregate income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting consumer-specific income risk is supported by the finding that it is negatively affected by received consumer transfers.

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Paper provided by National Bank of Belgium in its series Research series with number 200511-2.

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Length: 49 pages
Date of creation: Nov 2005
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Handle: RePEc:nbb:reswpp:200511-2

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Related research
Keywords: income uncertainty; consumption; precaution; state space models; GARCH errors; unobserved component; Bayesian.;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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Cited by:
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  3. M. Vanhoucke & B. Maenhout, 2005. "Characterisation and Generation of Nurse Scheduling Problem Instances," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/339, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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  6. L. Pozzi, 2005. "Income Uncertainty and Aggregate Consumption," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/334, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
  7. M. Dossche & G. Everaert, 2005. "Measuring inflation persistence: a structural time series approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/340, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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  8. H. Ooghe & C. Spaenjers & P. Vandermoere, 2005. "Business failure prediction: simple-intuitive models versus statistical models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/338, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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