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| Author: | Reis, R. |
| Title: | The time-series properties of aggregate consumption: Implications for the costs of fluctuations |
| Journal: | Journal of the European Economic Association
2009 : JUN, VOL. 7:4, p. 722-753 |
| Index terms: | consumption costs time series |
| Language: | eng |
| Abstract: | Estimates of the costs of fluctuations are affected by the properties of the stochastic process followed by aggregate consumption. This article pursues two approaches to modeling consumption dynamics and measuring how much society dislikes fluctuations. One approach is statistical and the other is economic. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. Through its impact on precautionary savings and investment, this uncovers a further cost of uncertainty. The statistical approach estimates the properties of consumption and calculates the costs of having consumption fluctuating around its mean growth. It is found that persistence is a crucial determinant of the costs. High persistence in the data severely distorts conventional measures. |
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