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Credit Constraints, Learning and Aggregate Consumption Volatility

Daniel Tortorice ()

No 6, Working Papers from Brandeis University, Department of Economics and International Businesss School

Abstract: This paper documents three empirical facts. First, the volatility of consumption growth relative to income growth rose from 1947-1960 and then fell dramatically by 50 percent from the 1960s to the 1990s. Second, the correlation between consumption growth and personal income growth fell by about 50 percent over the same time period. Finally, the absolute deviation of consumption growth from its mean exhibits one break in U.S. data, and the mean of the absolute deviations has fallen by about 30 percent. First, I find that a standard dynamic, stochastic general equilibrium model is unable to explain these facts. Then, I examine the ability of two hypotheses: a fall in credit constraints and changing beliefs about the permanence of income shocks to account for these facts. I find evidence for both explanations and the beliefs explanation is more consistent with the data. Importantly, I find that estimated changes in beliefs about the permanence of income shocks have significant explanatory power for consumption changes.

Keywords: Consumption; Business Fluctuations; Learning (search for similar items in EconPapers)
JEL-codes: D83 E21 E32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-11, Revised 2011-02
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Downloads: (external link)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP06.pdf Second version, 2009 (application/pdf)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP06R.pdf Third version, 2011 (application/pdf)

Related works:
Journal Article: CREDIT CONSTRAINTS, LEARNING, AND AGGREGATE CONSUMPTION VOLATILITY (2014) Downloads
Working Paper: Credit Constraints, Learning, and Aggregate Consumption Volatility (2010)
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