The time-series properties of aggregate consumption
Subtitle: implications for the costs of fluctuations
By: Ricardo Reis.
Contributors: Woodrow Wilson School of Public and International Affairs.
Series: Discussion papers in economics / Woodrow Wilson School of Public and International Affairs ;; no. 233; Discussion papers in economics (Woodrow Wilson School of Public and International Affairs : Online) ;; no. 233
Publisher: Woodrow Wilson School of Public and International Affairs
Published: 2005
Place of publication: [Princeton, NJ]
Language: eng
Format: Electronic resource
Description: "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."
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file (viewed on Apr. 28, 2005).
"April 2005."
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.