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The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuation

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  • Ricardo Reis

Abstract

While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption.

Suggested Citation

  • Ricardo Reis, 2005. "The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuation," NBER Working Papers 11297, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11297
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    3. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
    4. Gomes, Orlando, 2006. "Heterogeneous Researchers in a Two-Sector Representative Consumer Economy," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 60(2), November.
    5. Mariano M. Croce, 2006. "Welfare Costs, Long Run Consumption Risk, and a Production Economy," 2006 Meeting Papers 582, Society for Economic Dynamics.
    6. Wang, Peng-fei & Wen, Yi, 2011. "Volatility, growth, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1696-1709, October.
    7. Claudia Buch & Serkan Yener, 2010. "Consumption volatility and financial openness," Applied Economics, Taylor & Francis Journals, vol. 42(28), pages 3635-3649.
    8. Alessandro Federici & Pierluigi Montalbano, 2012. "Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis," Working Paper Series 3612, Department of Economics, University of Sussex.
    9. Keshav Dogra & Olga Gorbachev, 2016. "Consumption Volatility, Liquidity Constraints and Household Welfare," Economic Journal, Royal Economic Society, vol. 126(597), pages 2012-2037, November.
    10. Julian di Giovanni & Andrei A. Levchenko, 2006. "Openness, Volatility and the Risk Content of Exports," 2006 Meeting Papers 86, Society for Economic Dynamics.
    11. Guillen, Osmani Teixeira Carvalho & Issler, João Victor & Franco Neto, Afonso Arinos de Mello, 2012. "On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 734, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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    15. Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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