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Excess Volatility of Consumption in Developed and Emerging Markets: The Role of Durable Goods

Author

Listed:
  • Manuel Toledo

    (Universidad Carlos III (Department of Economics))

  • Luis B. Marques

    (Johns Hopkins University (SAIS))

  • Fernando A. Alvarez

    (Central Bank of Venezuela)

Abstract

We examine how much of the excess volatility of consumption puzzle in small open economies (Aguiar and Gopinath, JPE 2007) can be explained away by adding consumption of durable goods. Once we account for that, consumption is not as volatile as income for both developed and emerging market economies. However, the fact remains that consumption is still more volatile (relative to income) in emerging markets than in developed ones. We extend Aguiar and Gopinath's model of a small open economy with shocks to trend and cycle to include consumption of durable goods. Based on our simulations of a small open economy model with consumption of durable goods, we question the role for shocks to trend that have been previously documented in the literature.

Suggested Citation

  • Manuel Toledo & Luis B. Marques & Fernando A. Alvarez, 2009. "Excess Volatility of Consumption in Developed and Emerging Markets: The Role of Durable Goods," 2009 Meeting Papers 142, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:142
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    File URL: https://economicdynamics.org/meetpapers/2009/paper_142.pdf
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
    3. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    4. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    5. Carlos de Resende, 2006. "Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy," Staff Working Papers 06-37, Bank of Canada.
    6. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    7. Bernanke, Ben, 1985. "Adjustment costs, durables, and aggregate consumption," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 41-68, January.
    8. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-155, February.
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    Cited by:

    1. Naoussi, Claude Francis & Tripier, Fabien, 2013. "Trend shocks and economic development," Journal of Development Economics, Elsevier, vol. 103(C), pages 29-42.

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