Aggregate Consumption Growth Research Articles

China's Prosperous Middle Class and Consumption-led Economic Growth: Lessons from Household Survey Data

AbstractCan the expansion of a prosperous middle class help China to rebalance to consumption-led growth? We address this question through analysis of macro- and micro-level data. Using macro statistics, we examine trends in national aggregate consumption and GDP growth from 2000 through 2019. We observe growth in aggregate consumption but do not find convincing evidence of consumption-led growth. Using micro-level household survey data from 2002, 2007, 2013 and 2018, we estimate the size of China's prosperous middle class and its contribution to aggregate consumption growth. We find that the prosperous middle class expanded rapidly but contributed less to aggregate consumption growth than expected. We discuss features of this class that diminished its contribution to consumption-led growth, including its low propensity to consume out of income and its limited expansion beyond urban subgroups. We conclude that the expansion of the prosperous middle class is necessary but not sufficient to bring about rebalancing.

The Brexit Vote, Productivity Growth, and Macroeconomic Adjustments in the U.K.

Abstract The U.K. economy experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. To understand these adjustments, this paper presents empirical facts using novel U.K. macroeconomic data and estimates a small open economy model with tradable and non-tradable sectors. We demonstrate that the referendum outcome can be interpreted as news about a future decline in productivity growth in the tradable sector. An immediate fall in the relative price of non-tradable goods induces a temporary “sweet spot” for tradable producers. Economic activity in the tradable sector expands in the short run, while the non-tradable sector contracts. Aggregate output, consumption, and investment growth decelerate.

Government Capital Expenditure and Economic Growth in Nepal

This paper explores the short-run and long-run causal relationship between government expenditure, labor force, gross investment, aggregate consumption, and economic growth of Nepal. The gross domestic product (Y), capital expenditure (K), population (L), gross investment (GI), and aggregate consumption (CO) have been used to find the causal relationship between government expenditure, and economic growth. The ARDL cointegration technique confirms a long-run association among the variables. The study revealed that capital expenditure, labor force participation, gross investment, and aggregate consumption all are the long-run driver of the economic growth of Nepal. These findings tell that efficient and timely allocation and use of capital expenditure, expansion of public as well private investment, and increased aggregate consumption matters for economic growth. The study also shows the existence of unidirectional causation from capital expenditure to growth and bidirectional relationship between other variables. The findings support Keynesian thought of government expenditure and economic growth. The regulatory and policymakers should focus on expansionary fiscal policy to stimulate capital formation, efficient productive investment, boost effective demand, and enhance long-run economic growth in Nepal.

How does exchange rate elasticity of aggregate consumption adjust currency risk price in the stock market?

Based on a simple two-good, two-country CCAPM framework, in which aggregate consumption growth is connected to exchange rate fluctuations by the exchange rate elasticity of aggregate consumption (EREAC), we extend a parsimonious international CAPM model to detect the role of EREAC in the change in currency risk price and illustrate that EREAC moves explain the time-varying nature of currency risk price. In our model, currency risk price is expressed as a function of both EREAC and its related threshold value. Thus, under the condition of the identified correlation directionality between stock returns and exchange rate fluctuation, we claim that EREAC influences the currency risk price, where the two types of EREAC states (above or below its threshold value) have inverse effects on the currency risk price direction. Through an empirical test, we find evidence that EREAC can sagaciously adjust the currency risk price as we propose. Our main result implies that EREAC can be as a potential state variable in currency risk prices, and from the perspective of EREAC moves, we can give a partially plausible interpretation of the cause of the time-varying nature of currency risk prices to some extent.

Stock Market and No‐Dividend Stocks

ABSTRACTWe develop a stationary model of the aggregate stock market featuring both dividend‐paying and no‐dividend stocks within a familiar, parsimonious consumption‐based equilibrium framework. We find that such a simple feature leads to profound implications supporting several stock market empirical regularities that leading consumption‐based asset pricing models have difficulty reconciling. Namely, the presence of no‐dividend stocks in the stock market leads to a lower correlation between stock market returns and the aggregate consumption growth rate, a nonmonotonic and even negative relation between the stock market risk premium and its volatility, and a downward‐sloping term structure of equity risk premia.

Aggregate consumption and wealth in the long run: The impact of financial liberalization

SummaryThis paper investigates the impact of financial liberalization on the relationship between consumption and total wealth (i.e., the sum of asset wealth and human wealth). Financial liberalization is persistent and may signal changes in expected future consumption growth rates and/or in rates of return on wealth that, through the intertemporal budget constraint, affect the current consumption–wealth ratio. We estimate the long‐run relationship between consumption, total wealth, and financial liberalization by state space methods using quarterly US data. The results show that the trend in the consumption–wealth ratio is well‐captured by our baseline liberalization indicator. We find that the increase in this indicator over the sample period has increased the consumption–wealth ratio with about 10%. Investigating the responsible channel, additional estimates show that financial liberalization has predictive power for aggregate consumption growth rather than for returns, a result that supports an incomplete markets interpretation of the link between liberalization and the consumption–wealth ratio.

What Information Drives Asset Prices?

Abstract We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption and dividend growth, market return, the price-dividend ratio, real and nominal term structures, the low predictive power of the price-dividend ratio for consumption and dividends, and the dynamics of the price-dividend ratio, unlike a nested model with learning from consumption alone. (JEL E3, G12, G14)

Factor Forestry: Pruning using an Economic Chainsaw

Hundreds of anomalies, factors, or characteristic portfolios have been discovered whose risk-return spread is not explained by benchmark empirical factor models. Each of these is a potential candidate as a factor in such models. Efforts to narrow down this plethora of candidates to a parsimonious set has mainly relied on econometric and statistical tools. Standard textbooks, however, emphasize that factors in models proxy for the marginal utility of aggregate consumption growth. Imposing the economic restrictions that this link implies, we find that only 10-20 per cent of this forest of factors impound news about future consumption growth, the low-frequency risk of consumption growth or its extreme tails i.e. bad times. Interestingly, new factors used in models that perform better than the benchmark models do better in passing economically motivated hurdles. Our results imply that imposing theoretical restrictions, on this forest of potential factors can impose discipline, in the search for an ex-post MV efficient portfolios. In addition, applying an economic chainsaw to yet to be discovered anomalies could curb the growth of this forest.

What to expect when everyone is expecting: Self-fulfilling expectations and asset-pricing puzzles

We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents are marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well-documented empirical asset-pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

Stroke of a Pen: Investment and Stock Returns under Energy Policy Uncertainty

Energy policy uncertainty - as measured by uncertainty about a U.S. President signing an energy related executive order in the future - covaries positively with corporate investment and aggregate consumption growth, and its innovations carry a negative price of risk. I propose and test a q-theory explanation in which firms invest in energy-efficient capital when facing energy policy uncertainty. This uncertainty amplifies differences in investment between growth and value companies as the benefits of substituting energy for capital increase with growth opportunities. As the benefits to invest increase, aggregate current consumption decreases relative to future consumption, creating time varying expected variation in aggregate market returns and consumption growth. Without an investment factor, uncertainty betas explain cross-sectional variation in stock returns across portfolios that differ in their growth opportunities. However, since investment reacts to uncertainty endogenously, an asset pricing model that accounts for an investment factor absorbs the cross-sectional differences in expected returns explained by this policy uncertainty. My findings suggest that uncertainty about future energy policies in the last four decades can explain firms' adoption of energy-efficient capital.

Stock Price Movements: Business-Cycle and Low-Frequency Perspectives

Abstract We find that a business-cycle component of the aggregate dividend yield strongly predicts short-term aggregate dividend growth and consumption growth, whereas its low-frequency counterpart significantly forecasts long-horizon market returns. The dividend yield—the sum of these two components—has difficulty revealing variations in expected cash flow growth, because its low-frequency component tends to disguise such variations. Yet the low-frequency component has significant forecasting power for multiperiod returns at horizons of several years to as long as around 20 years, which is longer than the horizons typically exploited in prior studies that provide weak statistical evidence to challenge multiperiod return predictability. (JEL G12, G17) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Aggregate Consumption and Wealth in the Long Run: The Impact of Financial Liberalization

This paper investigates the impact of financial liberalization on the relationship between consumption and total wealth (i.e., the sum of asset wealth and human wealth). Financial liberalization is persistent and may signal changes in expected future consumption growth rates and/or in rates of return on wealth that, through the inter-temporal budget constraint, affect the current consumption-wealth ratio. We estimate the long-run relationship between consumption, total wealth and financial liberalization by state space methods using quarterly US data. The results show that the trend in the consumption-wealth ratio is well-captured by our baseline liberalization indicator. We find that the increase in this indicator over the sample period has increased the consumption-wealth ratio with about ten to sixteen percent. Investigating the responsible channel, additional estimates show that financial liberalization has predictive power for aggregate consumption growth rather than for returns, a result that supports an incomplete markets interpretation of the link between liberalization and the consumption-wealth ratio.

The "In(de-)flated" Value Premium

The value premium has disappeared over the last decade and this paper provides a risk-based explanation for its disappearance. I document a positive linear relationship among the value premium and the expected inflation at both high frequency and lower business cycle frequency. A heterogeneous cash flow model featuring inflation non-neutrality is proposed to justify the observed pattern. The estimated results suggest that value firms are more exposed to high-frequency fluctuations in aggregate consumption growth but less exposed to the low-frequency consumption risk. This finding is consistent with the documented inflation-return relationship but it contrasts with the previous findings suggesting that value firms are more sensitive to long-run consumption risk. Simulation-based results show that the positive linear relationship among the value premium and the expected inflation can be recovered when inflation is non-neutral and the relationship turns into uncorrelated when inflation is neutral. Therefore we argue that inflation non-neutrality can justify the positive relationship among inflation and value premium. Meanwhile, value firms tend to under-perform growth firms when the inflation is in low range, and it leads to the disappearance of the value premium.

What to Expect When Everyone is Expecting: Self-Fulfilling Expectations and Asset-Pricing Puzzles

We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents be marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well documented empirical asset pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

The Dog that Did Bark: Evidence on Dividend Growth Predictability

We find that a business-cycle component of the aggregate dividend yield strongly predicts short-term aggregate dividend growth and consumption growth, while its low-frequency counterpart significantly forecasts long-horizon market returns. The dividend yield, as the sum of these two components, has difficulty revealing variations in expected cashflow growth, because its low-frequency component tends to disguise such variations. The low-frequency component, on the other hand, has significant forecasting power for multiperiod returns at horizons of several years to as long as around 20 years—longer than the horizons typically exploited in prior studies that provide weak statistical evidence to challenge multiperiod return predictability.

Measuring Long Run Risks for Brazil

We study the temporal structure of risk prices, risk exposures and expected market returns for Brazil assuming the economy follows a long run risks model. The model consists on an endowment economy where aggregate consumption and dividend growth contain predictable components, and a representative agent has Epstein-Zin recursive preferences with CES specification. We show that aggregate consumption in Brazil is sufficiently predictable to generate risk premia associated with Epstein-Zin preferences in excess of traditional compensations induced by power utility. Moreover, risk compensation is dominated by permanent shocks both in the short and long run, as Epstein-Zin preferences mitigate the price of temporary shocks' risk.

Mutual Fund Performance When It Really Matters Most

Motivated by asset pricing evidence that disappointment periods in aggregate consumption growth are very good proxies for high marginal utility states, we examine whether equity fund performance exhibits state dependence. We find that the quintile of funds with the highest (lowest) unconditional CAPM alpha exhibits the biggest decrease (increase) in risk-adjusted performance during disappointment months. As a result, the alpha differential between unconditional winner and loser funds disappears when it matters most in utility terms. Our results indicate that the unconditional CAPM alpha is a highly misspecified performance measure from the viewpoint of a disappointment averse investor. To the contrary, state dependence is considerably attenuated when the 3-factor Fama-French alpha is used as performance measure. We conclude that the latter is the least misspecified unconditional performance measure, as it better aligns managerial incentives with the preferences of a disappointment averse investor. These findings are particularly important for fund performance measurement in light of the recent evidence that investors primarily evaluate funds on the basis of their CAPM alpha.

There’s Technology Improvement, but is there Economy-wide Energy Leapfrogging? A Country Panel Analysis

Energy leapfrogging may have critical implications for a world that seeks to reduce its fossil fuel use and greenhouse gas emissions, and in which most future economic growth will be concentrated in rapidly growing, industrializing countries rather than in more mature economies. The current paper explores whether country-level data supports the conclusion that developing countries have lower energy intensities today than mature economies had when those mature economies had per capita income levels similar to developing countries now. We employ a broad sample of aggregate energy consumption, energy prices, and economic growth observations for 24 OECD and 34 non-OECD countries, spanning 1960–2016. Our price dataset is particularly novel in two ways: it includes (1) early industrializer-OECD observations from the 1960s and 1970s, and (2) a high number of recent (2007–2016) non-OECD observations. And thus, importantly, our work differs from previous estimates in the temporal comparison between mature and industrializing groups. Our study finds empirical support for energy leapfrogging, expressed as the energy intensity of income growth; we show that industrializing economies are adopting less energy-intensive, and by implication less polluting, economic activities when their income levels reach the same per-capita GDP levels as the more mature OECD countries did in previous decades. Importantly, our results depend upon (i) the controls placed on income levels to represent comparable stages of economic development, and (ii) the rules defining the temporal dimension for technology transfer. Our results have significant implications for researchers and policy analysts interested in economic development: those results support previous analysis, concluding not only that energy technologies are being transferred internationally, but that technologies are reducing the energy, and by implication the climate footprint of many developing countries. For example, a back-of-the-envelope calculation suggested that energy leapfrogging lowered the growth rate of energy consumption by about 30% in non-OECD countries.

Leap-Frogging and Energy Consumption: A Country Panel Analysis

Energy leapfrogging may have critical implications for a world that seeks to reduce its fossil fuel use and greenhouse gas emissions, and in which most future economic growth will be concentrated in rapidly growing, industrializing countries rather than in more mature economies. The current paper explores whether country-level data supports the conclusion that developing countries have lower energy intensities today than mature economies had in decades past when those mature economies had per capita income levels similar to those of developing countries now. We employ a broad sample of aggregate energy consumption, energy prices, and economic growth observations for 26/27 OECD and 34 non-OECD countries, spanning 1960-2016. Our price dataset is particularly novel in two ways: it includes (1) early industrializer-OECD observations from the 1960s and 1970s, and (2) a high number of recent (2007-2016) non-OECD observations. And thus, importantly, our work differs from previous estimates in the temporal comparison between mature and industrializing groups. Our study finds empirical support for energy leapfrogging, expressed as the energy intensity of income growth; we show that industrializing economies are adopting less energy-intensive, and by implication less polluting, economic activities when their income levels reach the same per-capita GDP levels as the more mature OECD countries did in previous decades. Importantly, our results depend upon (i) the controls placed on income levels to represent comparable stages of economic development, and (ii) the rules defining the temporal dimension for technology transfer. Our results have significant implications for researchers and policy analysts interested in economic development: those results support previous analysis, concluding not only that energy technologies are being transferred internationally, but that technologies are reducing the energy, and by implication the climate footprint of many developing countries. For example, a back-of-the-envelope calculation suggested that energy leapfrogging lowered the growth rate of energy consumption by about 35% in non-OECD countries.

Heterogeneity and Asset Prices: A Different Approach

We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent’s consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).