Income Uncertainty and Aggregate Consumption

L. Pozzi ()
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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We investigate the relevance of aggregate and consumer-specific income uncertainty for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of income risk on consumption changes is decomposed into an aggregate and into a consumer-specific part. Empirically, aggregate risk is modelled through a GARCH process on aggregate income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting consumer-specific income risk is supported by the finding that it is negatively affected by received consumer transfers.

Keywords: income uncertainty; consumption; precaution; state space models; GARCH errors; unobserved component; Bayesian (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2005-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:05/334

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