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Credit Constraints, Learning and Aggregate Consumption Volatility

Author

Listed:
  • Daniel Tortorice

    (Department of Economics, Brandeis University)

Abstract
This paper documents three empirical facts. First, the volatility of consumption growth relative to income growth rose from 1947-1960 and then fell dramatically by 50 percent from the 1960s to the 1990s. Second, the correlation between consumption growth and personal income growth fell by about 50 percent over the same time period. Finally, the absolute deviation of consumption growth from its mean exhibits one break in U.S. data, and the mean of the absolute deviations has fallen by about 30 percent. First, I find that a standard dynamic, stochastic general equilibrium model is unable to explain these facts. Then, I examine the ability of two hypotheses: a fall in credit constraints and changing beliefs about the permanence of income shocks to account for these facts. I find evidence for both explanations and the beliefs explanation is more consistent with the data. Importantly, I find that estimated changes in beliefs about the permanence of income shocks have significant explanatory power for consumption changes.

Suggested Citation

  • Daniel Tortorice, 2007. "Credit Constraints, Learning and Aggregate Consumption Volatility," Working Papers 06, Brandeis University, Department of Economics and International Business School, revised Feb 2011.
    • Handle: RePEc:brd:wpaper:06
    as

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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP06.pdf
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP06R.pdf
    File Function: Third version, 2011
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    References listed on IDEAS

    as
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    Cited by:

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    More about this item

    Keywords

    Consumption; Business Fluctuations; Learning;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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