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Did Household Consumption Become More Volatile?

  • Olga Gorbachev

I show that after accounting for predictable variation arising from movements in real interest rates, preferences and income shocks, liquidity constraints and measurement errors, volatility of household consumption in the US increased by 25 percent between 1970 and 2004. The increase was lower than that of volatility of family income. Nonwhite and those with less than 13 years of education, for whom there was no differential increase in income volatility, experienced a significantly larger increase in volatility of household consumption. Substantial differences in wealth and access to credit markets point to the main reason for this divide. JEL: D12, D14, E21, J15

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 5 (August)
Pages: 2248-70

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:5:p:2248-70
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  1. Olga gorbachev, 2007. "Did Household Consumption Become More Volatile?," ESE Discussion Papers 161, Edinburgh School of Economics, University of Edinburgh.
  2. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers.
  3. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  4. Primiceri, Giorgio E. & van Rens, Thijs, 2009. "Heterogeneous life-cycle profiles, income risk and consumption inequality," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 20-39, January.
  5. Martin Browning & Sule Alan, 2006. "Estimating Euler Equations with Noisy Data: Two Exact GMM Estimators," Economics Series Working Papers 283, University of Oxford, Department of Economics.
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  7. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro Levels," Staff Reports 334, Federal Reserve Bank of New York.
  8. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  9. Haider, Steven J, 2001. "Earnings Instability and Earnings Inequality of Males in the United States: 1967-1991," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 799-836, October.
  10. Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
  11. Christopher D Carroll, 2001. "Precautionary Saving and the Marginal Propensity To Consume Out of Permanent Income," Economics Working Paper Archive 445, The Johns Hopkins University,Department of Economics, revised Aug 2009.
  12. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  13. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  14. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  15. Joseph Gyourko & Joseph Tracy, 2003. "Using home maintenance and repairs to smooth variable earnings," Staff Reports 168, Federal Reserve Bank of New York.
  16. Thomas Piketty & Emmanuel Saez, 2006. "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective," NBER Working Papers 12404, National Bureau of Economic Research, Inc.
  17. Olga Gorbachev & Keshav Dogra, 2010. "Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004," Working Papers 10-12, University of Delaware, Department of Economics.
  18. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  19. Tullio Jappelli & Luigi Pistaferri, 2010. "The Consumption Response to Income Changes," NBER Working Papers 15739, National Bureau of Economic Research, Inc.
  20. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  21. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  22. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  23. Chou, Shin-Yi & Grossman, Michael & Saffer, Henry, 2004. "An economic analysis of adult obesity: results from the Behavioral Risk Factor Surveillance System," Journal of Health Economics, Elsevier, vol. 23(3), pages 565-587, May.
  24. Peter Gottschalk, 1997. "Inequality, Income Growth, and Mobility: The Basic Facts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 21-40, Spring.
  25. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
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