Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption

Emmanuel De Veirman and Dunstan Ashley ()
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Dunstan Ashley: Reserve Bank of New Zealand

The B.E. Journal of Macroeconomics, 2011, vol. 11, issue 1, 41

Abstract: This paper studies the importance of intertemporal substitution in consumption for the cyclical co-movement of consumption, net worth and income. We can largely explain the empirical hump-shaped consumption response to a transitory wealth increase by allowing for time-varying returns in an otherwise standard Permanent Income Hypothesis (PIH) model. At the net worth peak, households bring consumption forward in anticipation of low returns on saving. The PIH model fully explains the empirical response when households initially expect the net worth shock to be permanent, but gradually learn that it is in fact transitory.

Keywords: Permanent Income Hypothesis; time-varying returns; intertemporal substitution effect (search for similar items in EconPapers)
Date: 2011
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Working Paper: Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption (2011)
Working Paper: Time-varying returns, intertemporal substitution and cyclical variation in consumption (2011)
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DOI: 10.2202/1935-1690.1958

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