Private Consumption Behavior Research Articles

Macroeconomic dynamics and reallocation in an epidemic: evaluating the ‘Swedish solution’

Abstract In this paper, we argue that endogenous shifts in private consumption behaviour across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. We introduce a susceptible-infected-recovered epidemiological model into a neoclassical production economy in which goods are distinguished by the degree to which they can be consumed at home rather than in a social, possibly contagious context. We demonstrate within the model, that the ‘Swedish solution’ of letting the epidemic play out without much government intervention and allowing agents to reduce their overall consumption as well as shift their consumption behaviour towards relatively safe sectors can lead to substantial mitigation of the economic and human costs of the COVID-19 crisis. We argue that significant seasonal variation in the infection risk is needed to account for the two-wave nature of the pandemic. We estimate the model on Swedish health data and show that it predicts the dynamics of weekly deaths, aggregate as well as sectoral consumption, that accord well with the empirical record and the two-waves for Sweden for 2020 and early 2021. We also characterize the allocation a social planner would choose and how it would dictate sectoral consumption patterns. In so doing, we demonstrate that the laissez-faire outcome with sectoral reallocation mitigates the economic and health crisis but possibly at the expense of unnecessary deaths and too massive a decline in economic activity.

Macroeconomic Dynamics and Reallocation in an Epidemic

In this paper we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. Extending the theoretical framework proposed by Eichenbaum-Rebelo-Trabandt (2020), we distinguish goods by their degree to which they can be consumed at home rather than in a social (and thus possibly contagious) context. We demonstrate that, within the model the “Swedish solution” of letting the epidemic play out without government intervention and allowing agents to shift their sectoral behavior on their own can lead to a substantial mitigation of the economic and human costs of the COVID-19 crisis, avoiding more than 80 of the decline in output and of number of deaths within one year, compared to a model in which sectors are assumed to be homogeneous. For different parameter configurations that capture the additional social distancing and hygiene activities individuals might engage in voluntarily, we show that infections may decline entirely on their own, simply due to the individually rational re-allocation of economic activity: the curve not only just flattens, it gets reversed.

Macroeconomic Dynamics and Reallocation in an Epidemic

In this paper, we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. We introduce a SIR epidemiological model into a neoclassical production economy in which goods are distinguished by the degree to which they can be consumed at home rather than in a social, possibly contagious context. We demonstrate within the model, that the “Swedish solution” of letting the epidemic play out without much government intervention and allowing agents to reduce their overall consumption as well as shift their consumption behavior towards relatively safe sectors can lead to substantial mitigation of the economic and human costs of the COVID-19 crisis. We argue that significant seasonal variation in the infection risk is needed to account for the two-wave nature of the pandemic. We estimate the model on Swedish health data and show that it predicts the dynamics of weekly deaths, aggregate as well as sectoral consumption, that accord well with the empirical record and the two-waves for Sweden for 2020 and early 2021. We also characterize the allocation a social planner would choose and how it would dictate sectoral consumption patterns. In so doing, we demonstrate that the laissez-faire outcome with sectoral reallocation mitigates the economic and health crisis but possibly at the expense of unnecessary deaths and too massive a decline in economic activity.

DYNAMICS OF CONSUMER EXPENDITURE AND STOCK MARKET PRICES AND UNCERTAINTY: MALAYSIAN EVIDENCE

The present paper analyzes the role of stock market, more specifically real stock prices and stock market uncertainty/volatility, on private consumption behavior for an emerging market, Malaysia, using quarterly data from 1991 to 2009. Employing the autoregressive distributed lag approach to cointegration test, the paper establishes a long-run equilibrium that ties private consumption to its determinants — real income, real stock prices, real lending rate, and stock market volatility. In the long run, the presence of the stock market wealth effect is documented. At the same time, the stock market volatility is also noted to depress private consumption particularly when the volatility is at the degree as observed during the Asian crisis. The authors further note the short-run influences of real stock price changes on consumption growth and the adjustment of private consumption to the long-run level when it is modeled in an error-correction setting. Our simple simulation indicates that the drop in the private consumption due to the decline in stock market wealth post-crisis is substantial, amounting to 2.7% of average post-crisis gross domestic product.

And action: TV sentiment and the US consumer

With a novel data set, we test whether sentiment in TV news can be used as a proxy for consumer sentiment in order to explain changes in private consumption growth in the United States. The University of Michigan Index of Consumer Sentiment (ICS) is taken to compare its explanatory power with TV sentiment in classical consumer behaviour models. We find that TV sentiment can be used at least as good a proxy for consumer sentiment as the ICS, while TV sentiment can best explain private consumption behaviour with personal income and savings.

And Action: TV Sentiment and the US Consumer

With a novel dataset, we test whether sentiment in TV news can be used as a proxy for consumer sentiment in order to explain changes in private consumption growth in the United States. The University of Michigan Index of Consumer Sentiment is taken to compare its explanatory power with TV sentiment in classical consumer behavior models. We find that TV sentiment can be used at least as good a proxy for consumer sentiment as the Index of Consumer Sentiment, while TV sentiment can best explain private consumption behavior with personal income and savings.

And Action: TV Sentiment and the US Consumer

With a novel data set, we test whether sentiment in TV news can be used as a proxy for consumer sentiment in order to explain changes in private consumption growth in the United States. The University of Michigan Index of Consumer Sentiment (ICS) is taken to compare its explanatory power with TV sentiment in classical consumer behaviour models. We find that TV sentiment can be used at least as good a proxy for consumer sentiment as the ICS, while TV sentiment can best explain private consumption behaviour with personal income and savings.

Fiscal policy and private consumption behaviour: The Spanish case

In this article we analyse whether the Ricardian equivalence hypothesis is a valid approximation for Spain’s economic reality or whether there exist deviations from that situation which would be more in line with the conventional Keynesian perspective of the effects of debt on private consumption-savings decisions. Our aim is to contribute to the rather sparse empirical literature on the subject for the Spanish case. The analysis is based on annual aggregate data for Spain covering the years 1955 to 2000, and uses both the structural and the Euler equation approaches to test the neutrality proposition, and is thus to be considered as a generalization of foregoing work on the Spanish economy. The findings indicate that support for Ricardian equivalence is mixed, while we also find very little support for the Keynesian specification of consumption and fiscal policy.

Consumption behaviour and persistently high inflation: evidence from Latin America

A major difficulty in estimating consumption functions when prices are not fixed is the perverse effect of inflation on private consumption behaviour. This paper examines an Euler equation-type consumption function to analyse consumption behaviour in a context of persistent high inflation. The paper examines how widespread backward-looking indexation and/or partial or total currency substitution in the case of dollarisation affect private consumption behaviour. Widespread indexation and/or dollarisation are expected to create a type of insurance against adverse investment outcomes. This leads to ex post efficient risk allocation and provides an important mechanism for smoothing consumption in the presence of uninsurable income shocks, such as inflation surprises. Latin American data is used in this paper due to the recent history of chronic inflation in the region.

Private consumption behaviour, liquidity constraints and financial deregulation in France: a nonlinear analysis

This paper examines the effect of financial deregulation on consumption expenditure in France during the period 1970–1993. A nonlinear model for consumption which allows for liquidity constraints through a time-varying parameter dependent on a proxy for financial deregulation is estimated using nonlinear instrumental variables. It is concluded that in France financial deregulation has significantly reduced liquidity constraints faced by consumers, allowing a higher percentage of the population to smooth consumption over time. Evidence is also provided that the intertemporal elasticity of substitution is not significantly different from zero at conventional nominal levels of significance.

Real interest rates, liquidity constraints and financial deregulation: Private consumption behavior in the U.K.

We examine the effect of financial deregulation on consumption expenditure in the United Kingdom. A non-linear model for consumption which allows for liquidity constraints through a time-varying parameter dependent on a proxy for financial deregulation is estimated using non-linear instrumental variables. It is concluded that U.K. financial deregulation has significantly reduced liquidity constraints faced by consumers, allowing a higher percentage of the population to smooth consumption over time. The estimated path of the time-varying parameter, interpreted as the proportion of income going to liquidity-constrained households, is consistent with the process of U.K. financial deregulation.

Testing a present-value model of the current account: Evidence from US and Canadian time series

This paper presents a simple model of current account determination, based upon the permanent-income hypothesis of private consumption behavior, under rational expectations. The model employs a representative national agent, who is forward-looking and can borrow and lend at a constant world interest rate. A present-value relationship for the current account is derived and its implications are tested on post-war data for the United States and Canada. Testing is done using the framework developed by Campbell and Shiller (1987), which allows the forcing variables in the model to be difference rather than trend stationary. Our empirical results indicate the most stringent restrictions of the present-value model are strongly rejected by the US and Canadian data. However less formal procedures suggest the consumption smoothing model has some ability to track the dynamic behavior of the US current account. (JEL F32)

Fiscal Policy and Private Consumption: Instrumental Variables Tests of the "Consolidated Approach"

SINCE BARRO s (1974) RESTATEMENT of the debt proposition, economists have directed considerable research toward determining whether fiscal policy can affect aggregate demand. Most of the debate, both theoretical and empirical, has focused on the net wealth content of privately held government debt. Although existing research has hardly provided a definitive resolution to this debate (see, for example, Blinder and Deaton 1985, Bernheim 1987, Barro 1989), recent efforts (Feldstein 1982, Kormendi 1983, Aschauer 1985, Leiderman and Razin 1988) have followed Bailey (1971) and broadened the scope of the investigation to include the possibility that government expenditures substitute for private consumption expenditures. In doing so, Feldstein, Kormendi, and Aschauer have shown that fiscal neutrality implies certain restrictions on private consumption behavior. The first of these restrictions is what Feldstein (1982) calls ex ante crowding-out. For complete ex ante crowding-out, government spending on goods and services must substitute dollar-for-dollar for private spending. Consequently, an increase in government expenditures on consumption goods should lead to an equivalent decrease in private consumption expenditures. A second restriction is that government finance decisions should not affect private consumption. Barro (1974) has derived conditions under which this result will obtain. Essentially, maximizing consumers are assumed to be rational and forward-looking, accurately foreseeing future taxes implied by

Private Consumption and Saving: The Cases of Mexico and Chile

This paper examines the behavior of private consumption in Mexico and Chile. Understanding private consumption behavior in developing countries is receiving increasing attention at a time many of them are required to substitute national saving for external saving. For both countries dealt with in this study, changes in the real rate of interest appeared to have a sizable negative effect on private consumption. Private consumption also appeared to be (positively) influenced by real net capital inflows. An empirical approximation to permanent income also appears relevant for both countries, in particular for Mexico, where the sum of the 2-year income elasticities was very close to 1.0. Finally, government consumption did not appear as a relevant variable in either country.

Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Evidence for the U.K. Economy

Previous articleNext article No AccessConfirmations and ContradictionsStochastic Implications of the Life Cycle-Permanent Income Hypothesis: Evidence for the U.K. EconomyVince Daly, and George HadjimatheouVince Daly Search for more articles by this author , and George Hadjimatheou Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 89, Number 3Jun., 1981 Article DOIhttps://doi.org/10.1086/260990 Views: 11Total views on this site Citations: 10Citations are reported from Crossref Copyright 1981 The University of ChicagoPDF download Crossref reports the following articles citing this article:Robert Gausden, Ian Alan Whitfield Testing the stochastic implications of the life cycle-permanent income hypothesis using UK regional time-series data, Applied Economics 32, no.1010 (Aug 2000): 1299–1310.https://doi.org/10.1080/000368400404452Lucio Sarno, Mark P. Taylor Real interest rates, liquidity constraints and financial deregulation: Private consumption behavior in the U.K., Journal of Macroeconomics 20, no.22 (Jan 1998): 221–242.https://doi.org/10.1016/S0164-0704(98)00055-XRoland C. Craigwell, Llewyn L. Rock Evaluating the rational expectations/permanent income hypothesis: Evidence from Caribbean countries, The North American Journal of Economics and Finance 3, no.11 (Mar 1992): 21–37.https://doi.org/10.1016/1062-9408(92)90010-ORONALD MacDONALD, COLM KEARNEY CONSUMPTION, COINTEGRATION AND RATIONAL EXPECTATIONS: SOME AUSTRALIAN EVIDENCE, Australian Economic Papers 29, no.5454 (Jun 1990): 40–52.https://doi.org/10.1111/j.1467-8454.1990.tb00470.x Arthur Lewbel Bliss Levels That Aren't, Journal of Political Economy 95, no.11 (Oct 2015): 211–215.https://doi.org/10.1086/261450Andres Drobny, Alan Speight Consumption and Income: Some Simple Excercises with Panel Data, Applied Economics 18, no.77 (Jul 2006): 757–775.https://doi.org/10.1080/00036848600000090Francis Green A Critique of the Neo-Fisherian Consumption Function, Review of Radical Political Economics 16, no.2-32-3 (Aug 2016): 95–114.https://doi.org/10.1177/048661348401600205PAUL JOHNSON Life-Cycle Consumption under Rational Expectations: Some Australian Evidence*, Economic Record 59, no.44 (Dec 1983): 345–350.https://doi.org/10.1111/j.1475-4932.1983.tb00824.xRobert Buckley, John Ermisch GOVERNMENT POLICY AND HOUSE PRICES IN THE UNITED KINGDOM: AN ECONOMETRIC ANALYSIS, Oxford Bulletin of Economics and Statistics 44, no.44 (May 2009): 273–304.https://doi.org/10.1111/j.1468-0084.1982.mp44004001.xN.Gregory Mankiw The permanent income hypothesis and the real interest rate, Economics Letters 7, no.44 (Jan 1981): 307–311.https://doi.org/10.1016/0165-1765(81)90034-3