Time-varying returns, intertemporal substitution and cyclical variation in consumption

Emmanuel De Veirman and Ashley Dunstan
Additional contact information
Ashley Dunstan: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No DP2011/05, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: This paper studies the importance of intertemporal substitution in consumption for the cyclical co-movement of consumption, net worth and income in New Zealand. 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.

JEL-codes: C22 C32 E21 (search for similar items in EconPapers)
Pages: 47 p.
Date: 2011-08
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: 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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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2011/05

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