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Income uncertainty and aggregate consumption

Author

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  • L. Pozzi

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

Abstract

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.

Suggested Citation

  • L. Pozzi, 2005. "Income uncertainty and aggregate consumption," Working Paper Research 77, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200511-2
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp77.pdf
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    References listed on IDEAS

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    1. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
    2. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
    3. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
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    Citations

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    Cited by:

    1. Maarten Dossche & Gerdie Everaert, 2005. "Measuring Inflation Persistence: A Structural Time Series Approach," Computing in Economics and Finance 2005 459, Society for Computational Economics.
    2. M. Vanhoucke & B. Maenhout, 2005. "Characterisation and Generation of Nurse Scheduling Problem Instances," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/339, Ghent University, Faculty of Economics and Business Administration.
    3. Jan Lepoutre & Nikolay Dentchev & Aimé Heene, 2007. "Dealing With Uncertainties When Governing CSR Policies," Journal of Business Ethics, Springer, vol. 73(4), pages 391-408, July.
    4. H. Ooghe & C. Spaenjers & P. Vandermoere, 2005. "Business failure prediction: simple-intuitive models versus statistical models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/338, Ghent University, Faculty of Economics and Business Administration.
    5. N. Geeroms & P. Van Kenhove & W. Verbeke, 2005. "Health Advertising to promote Fruit and Vegetable Intake: Application of need-related Health Audience Segmentation," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/336, Ghent University, Faculty of Economics and Business Administration.
    6. B. Maenhout & M. Vanhoucke, 2005. "New Computational Results for the Nurse Scheduling Problem: A Scatter Search Algorithm," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/341, Ghent University, Faculty of Economics and Business Administration.
    7. J. Albrecht & M. Neyt & T. Verbeke, 2005. "Bureaucratisation and the growth of health care expenditures in Europe," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/335, Ghent University, Faculty of Economics and Business Administration.
    8. L. Pozzi, 2005. "Income Uncertainty and Aggregate Consumption," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/334, Ghent University, Faculty of Economics and Business Administration.

    More about this item

    Keywords

    income uncertainty; consumption; precaution; state space models; GARCH errors; unobserved component; Bayesian.;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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