Aggregate Consumption Growth Research Articles

Decision Frequency and Synchronization Across Agents: Implications for Aggregate Consumption and Equity Return

ABSTRACTThis article examines a model in which decisions are made at fixed intervals and are unsynchronized across agents. Agents choose nondurable consumption and portfolio composition, and either or both can be chosen infrequently. A small utility cost is associated with both decisions being made infrequently. Calibrating returns to the U.S. economy, less frequent and unsynchronized decision‐making delivers the low volatility of aggregate consumption growth and its low correlation with equity return found in U.S. data. Allowing portfolio rebalancing to occur every period has a negligible impact on the joint behavior of aggregate consumption and returns.

Private consumption, public consumption and liquidity constraints in developing countries: some empirical evidence

This paper extends the empirical work of Giovannini (1983, 1985) in seeking to identify the elasticity of substitution in consumption in developing countries using the Euler equation approach. Allowing for liquidity constraints in capital markets which force a percentage of aggregate consumption growth to track income growth to track income growth, we report static and time-varying estimates of this percentage and the elasticity of intertemporal substitution, as well as estimates of substitution between private and public consumption and implied utility function parameters. Our results suggest that liquidity constraints are a pervasive feature of developing country consumption data and that the elasticity of intertemporal substitution is near-zero for the majority of countries considered.

On the Aggregation of Euler Equations for Consumption in Simple Overlapping-Generations Models

If consumers have finite lives, the aggregate consumption growth equation is affected by entries and exits (births and deaths). We use two- and three-period overlapping-generations (OLG) models to show that entries and exits produce a relationship between aggregate con- sumption growth and the interest rate that is fundamentally different from the individual Euler equation for consumption. If aggregate data are used to estimate an 'aggregate' Euler equation, under plausible assumptions we show that the estimate of the elasticity of intertem- poral substitution is downward biased and that consumption growth exhibits excess sensitivity to labour income. Since Hall's (1978) paper, the life-cycle model of consumption has been exten- sively tested using aggregated consumption data. The assumption of an infin- itely lived representative agent has been exploited to justify using National Accounts data to estimate the structural parameters of the model. The moment restrictions implied by the first-order conditions of the representative agent intertemporal optimization problem have been used to such a purpose. When the over-identifying restrictions implied by the model are tested, they are typ- ically rejected. Furthermore, expected consumption changes are often found to be correlated with expected income changes (Campbell and Mankiw 1989). This indicates either a violation of the hypothesis of rational behaviour or, more likely, a violation of one of the many other assumptions used to make the model empirically operative. Surprisingly enough, aggregation issues have not received much attention as an explanation of the empirical failure of the model. Elsewhere (Attanasio and Weber 1993) we have shown how various aspects of aggregation, ranging from the issue of nonlinearities to the impossibility of controlling for individual variables that are likely to affect marginal utility, can explain the rejection of the model estimated on aggregate time-series data. In this paper we focus on another source of aggregation bias: finite lives and the lack of complete markets. If consumers are identical and infinitely lived, the Euler equation for con- sumption aggregates trivially. However, in the presence of finite lives and heterogeneous consumers, even though the Euler equation relating periods t and t + 1 holds for each set of similar consumers alive in those periods, when we consider aggregate consumption we do not necessarily have an aggregate Euler equation.

Risk and Return: Consumption Beta Versus Market Beta

Much recent work emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross-section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.