Consumption Spending and the Paper-Bill Spread: Theory and Evidence

Christian Weber

Economic Inquiry, 1998, vol. 36, issue 4, 575-89

Abstract: This paper explains recent findings that the paper-bill spread helps forecast consumption spending using an intertemporal optimizing model of consumption and portfolio allocation. The spread is simply the opportunity cost in terms of foregone future consumption of holding government debt rather than higher yielding private debt. Thus, if government debt appears along with consumption in the single period utility function, the spread appears in one of the Euler equations for consumption and asset accumulation. Empirical tests strongly support the model. Finally, including the spread in a rule of thumb model of consumption reduces the importance of nonoptimizing behavior. Copyright 1998 by Oxford University Press.

Date: 1998
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