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Excess Volatility of Consumption in Developed and Emerging Markets: The Role of Durable Goods

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Author Info

  • Manuel Toledo

    (Universidad Carlos III (Department of Economics))

  • Luis B. Marques

    (Johns Hopkins University (SAIS))

  • Fernando A. Alvarez

    (Central Bank of Venezuela)

Abstract

We examine how much of the excess volatility of consumption puzzle in small open economies (Aguiar and Gopinath, JPE 2007) can be explained away by adding consumption of durable goods. Once we account for that, consumption is not as volatile as income for both developed and emerging market economies. However, the fact remains that consumption is still more volatile (relative to income) in emerging markets than in developed ones. We extend Aguiar and Gopinath's model of a small open economy with shocks to trend and cycle to include consumption of durable goods. Based on our simulations of a small open economy model with consumption of durable goods, we question the role for shocks to trend that have been previously documented in the literature.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 142.

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Date of creation: 2009
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Handle: RePEc:red:sed009:142

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  2. Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
  3. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February.
  4. Carlos de Resende, 2006. "Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy," Working Papers 06-37, Bank of Canada.
  5. Ben S. Bernanke, 1982. "Adjustment Costs, Durables, and Aggregate Consumption," NBER Working Papers 1038, National Bureau of Economic Research, Inc.
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Cited by:
  1. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
  2. Claude Francis Naoussi & Fabien Tripier, 2013. "Trend Shocks and Economic Development," Working Papers 2013-03, CEPII research center.

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