Covid-19 and the Return of the 3-Star Consumption Functions in the US

Mariam Tchanturia (mariam.tchanturia@nbg.gov.ge), Jared Laxton (jaredlaxton@gmail.com), Douglas Laxton (laxtoneconomics@gmail.com) and Shalva Mkhatrishvili (shalva.mkhatrishvili@nbg.gov.ge)
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Mariam Tchanturia: Macroeconomic Research Division, National Bank of Georgia
Jared Laxton: Economist at Advanced Macro Policy Modelling (AMPM)
Douglas Laxton: NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project
Shalva Mkhatrishvili: Head of Macroeconomics and Statistics Department, National Bank of Georgia

No 03/2024, NBG Working Papers from National Bank of Georgia

Abstract: COVID-19 was an unprecedented event that led to an extraordinary fiscal and monetary stimulus that resulted in a doubling in the S&P and over 50 percent increase in property prices in the US. These increases in asset prices combined with financial saving resulted in a 45 trillion dollar increase in US household net worth between 2020Q1 and 2023Q4, over twice the value of all goods and services produced by the US economy in 2019 (annual GDP was 21 trillion dollars in 2019). We believe this macroeconomic backdrop will play a prominent role in how the economy is going to evolve in the post-COVID-19 world. Our analysis begins with looking at the drivers of US consumption pre-COVID-19 and during COVID-19. We carry out a 2-step regression analysis by estimating the US consumption function in different periods with distinct features and incorporating different variables at each step to achieve stability in the parameters during the COVID-19 period. We use this analysis as a jumping off point for thinking about potential macro-financial risks caused by imbalances in the economy and whether monetary policy has been sufficient to reign in real economic activity. Our analysis suggests that the lower postCOVID-19 saving rate will likely persist until the economy experiences a tightening in financial conditions and large correction in equity and house prices.

Keywords: Consumption Function; Monetary Policy; Neutral Rate (search for similar items in EconPapers)
JEL-codes: E20 E21 E43 E52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-06
New Economics Papers: this item is included in nep-ban and nep-cba
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