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Income uncertainty and aggregate consumption

Author

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  • L. Pozzi

    (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))

Abstract

We investigate the relevance of aggregate and consumer-specific income uncertainty for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of income risk on consumption changes is decomposed into an aggregate and into a consumer-specific part. Empirically, aggregate risk is modelled through a GARCH process on aggregate income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting consumer-specific income risk is supported by the finding that it is negatively affected by received consumer transfers.

Suggested Citation

  • L. Pozzi, 2005. "Income uncertainty and aggregate consumption," Working Paper Research 77, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:200511-2
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    More about this item

    Keywords

    income uncertainty; consumption; precaution; state space models; GARCH errors; unobserved component; Bayesian.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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