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Income uncertainty and aggregate consumption

  • L. Pozzi

    ()

    (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

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    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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    File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP77.pdf
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    Paper provided by National Bank of Belgium in its series Working Paper Research with number 77.

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