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Macroeconomic volatility, consumption behaviour and welfare: A cross-country analysis

Author

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  • Alessandro Federici

    () (Italian National Agency for New Technologies, Energy and Sustainable Economic Development)

  • Pierluigi Montalbano

    () (University of Sussex and Sapienza University.)

Abstract

This work presents a robust empirical approach to dealing with the issue of the long run relationship between macroeconomic volatility, consumption behaviour and welfare for a large sample of countries. Differing from previous works, our empirical strategy is grounded on consumption and takes account of the role of persistence in consumption/income volatility. Our main conclusion is twofold: on one hand, we determine that aggregate volatility exerts, on average and ceteris paribus, a significant impact in deviating consumption from its smoothing path, producing aggregate extra saving, and in hampering future consumption prospects. This relationship holds across countries, including the poorest ones, and is becoming more significant in recent years. On the other hand, by deliberately proposing conservative estimates, we confirm Lucas' (1987) intuition about the low value of stabilisation policies, both across-countries and in the long-run. Our empirical evidence provides new insights into the long standing debate about the costs of fluctuations. First, it shows that the poorest countries hold a significant amount of "extra saving" too, because of economic fluctuations. Second, it underlies that, on average, uncertainty affects not only the volatility of consumption around its mean but the mean itself (Elbers and Gunning, 2003).

Suggested Citation

  • 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.
  • Handle: RePEc:sus:susewp:3612
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    File URL: http://www.sussex.ac.uk/economics/documents/wps36-2102-montalbano.pdf
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    References listed on IDEAS

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    Cited by:

    1. Emiliano Magrini & Pierluigi Montalbano, 2012. "Trade openness and vulnerability to poverty: Vietnam in the long-run (1992-2008)," Working Paper Series 3512, Department of Economics, University of Sussex.

    More about this item

    Keywords

    consumption; volatility; precautionary saving; welfare; developing countries;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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