Title

The time-series properties of aggregate consumption: implications for the costs of fluctuations

Author(s)

Ricardo Reis Ricardo Reis (Princeton University, NBER, and CEPR)

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.

Creation Date

2005-04

Section URL ID

WWSEcon

Paper Number

dp233.pdf

URL

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.594.4103&rep=rep1&type=pdf

File Function

Jel

E32, E21, E60

Keyword(s)

Costs of fluctuations; Models of aggregate consumption; Consumption persistence

Suppress

false

Series

4