Fluctuation Risk in an Aggregated Ss-model
AbstractUsing U.S. data it is shown that as the stock market goes into a period of high volatility, nondurables consumption is unaffected but durables consumption falls substantially. It is argued that a plausible explanation for this is that consumers face irreversibilities when adjusting their durables stock. They will thus apply Ss-type rules with bandwidths with widths that vary over time as in Hassler (1996). To quantify the aggregate implications of such behavior an aggregated irreversible investment model for consumer durables is estimated on U.S. It is found that a shift to higher risk leads to a simultaneous widening of individual Ss-bands which causes demand to fall substantially. This effect diminishes over time but is substantial also after a year.
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Bibliographic InfoPaper provided by Stockholm University, Institute for International Economic Studies in its series Homapage Papers with number _002.
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- John Hassler, 1996. "Fluctuating risk in an aggregated Ss-model," Discussion Paper / Institute for Empirical Macroeconomics 113, Federal Reserve Bank of Minneapolis.
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