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Did Household Consumption Become More Volatile?

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Abstract
We show that volatility of household consumption, after accounting for predictable variation arising from movements in real interest rates, preferences and income shocks, increased between 1970 and 2002. For single parent households, and households headed by nonwhite or poorly educated individuals, this rise was significantly larger. This stands in sharp contrast with the dramatic fall in aggregate volatility of the US economy, and may have significant welfare implications. A spectacular fall in average covariances of consumption growth rates across households over this period accounts for the diverging paths of aggregate and household level volatilities.

Suggested Citation

  • Olga Gorbachev, 2007. "Did Household Consumption Become More Volatile?," Edinburgh School of Economics Discussion Paper Series 161, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:161
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    More about this item

    Keywords

    consumption risk; volatility decomposition; aggregate volatility; panel data;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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