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Income Uncertainty and Aggregate Consumption

  • L. POZZI

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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://wps-feb.ugent.be/Papers/wp_05_334.pdf
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    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 05/334.

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    Length: 52 pages
    Date of creation: Oct 2005
    Date of revision:
    Handle: RePEc:rug:rugwps:05/334
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    Web page: http://www.ugent.be/eb

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    27. M. Vanhoucke & S. Vandevoorde, 2005. "A simulation and evaluation of earned value metrics to forecast the project duration," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/317, Ghent University, Faculty of Economics and Business Administration.
    28. M. Vanhoucke & D. Debels, 2005. "The Discrete Time/Cost Trade-Off Problem Under Various Assumptions Exact And Heuristic Procedures," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/314, Ghent University, Faculty of Economics and Business Administration.
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