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Cyclical consumption

Author

Listed:
  • Tino Berger

    (University of Goettingen)

  • Lorenzo Pozzi

    (Erasmus University of Rotterdam)

Abstract

Recessions and expansions are often caused or reinforced by developments in private consumption - the largest component of aggregate demand - which, as a result, varies over the business cycle. As such, an accurate measurement of the cyclical component of consumption and an understanding of its drivers is essential. We estimate US cyclical consumption using a multivariate Beveridge-Nelson decomposition based on a medium-scale Bayesian vector autoregression. The choice of variables included in the analysis is informed by a general savers-spenders model. We compare the predictive power of our multivariate cyclical consumption variable to that of univariate measures such as the recently introduced cc variable by Atanasov et al. (2020). An informational decomposition points to variables related to incomplete markets (precautionary motives and credit constraints) as the main contributors to cyclical consumption. This is confirmed by a causal analysis that attributes between 20% and 40% of cyclical movements in consumption to uncertainty shocks.

Suggested Citation

  • Tino Berger & Lorenzo Pozzi, 2023. "Cyclical consumption," Tinbergen Institute Discussion Papers 23-064/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20230064
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    More about this item

    Keywords

    cyclical consumption; Beveridge-Nelson decomposition; multivariate information; incomplete markets; uncertainty shocks;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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