Why is consumption more volatile than output in emerging markets?

Marina Azzimonti and Matthew Talbert
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Matthew Talbert: University of Texas at Austin

No 30, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed coun- tries. In this paper we provide a novel explanation of the consumption volatility puzzle based on political factors. In our model groups that disagree on the size of government alternate in power and face aggre- gate uncertainty. While productivity shocks only affect consumption through responses to output, political shocks change the composi- tion between private and public consumption for a given output size. As less stable governments and more polarized societies characterize emerging market economies the effects of political shocks are more pro- nounced. For a reasonable set of parameters we confirm the empirical relationship between political polarization and the ratio of consump- tion volatility to output volatility across countries.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:30

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More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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