The time-series properties of aggregate consumption: implications for the costs of fluctuations

Ricardo Reis

No 134, Working Papers from Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.

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.

Keywords: Costs of fluctuations; Models of aggregate consumption; Consumption persistence (search for similar items in EconPapers)
JEL-codes: E32 E21 E60 (search for similar items in EconPapers)
Date: 2005-04
References: Add references at CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://wws.princeton.edu/econdp/pdf/dp233.pdf

Related works:
Journal Article: The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations (2009)
Working Paper: The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations (2005)
Working Paper: The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuation (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:pri:wwseco:134

Access Statistics for this paper

More papers in Working Papers from Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
Contact information at EDIRC.
Series data maintained by David Long ().