The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations

Ricardo Reis

No 5054, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption.

Keywords: Costs of fluctuations; Models of aggregate consumption; Consumption persistence (search for similar items in EconPapers)
JEL-codes: E21 E32 E60 (search for similar items in EconPapers)
Date: 2005-05
New Economics Papers: this item is included in nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations (2009)
Working Paper: The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuation (2005)
Working Paper: The time-series properties of aggregate consumption: implications for the costs of fluctuations (2005)
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