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Credit Constraints, Learning and Aggregate Consumption Volatility

By Daniel L. Tortorice Y

Abstract

This paper documents three empirical facts. First, the volatility of consumption growth relative to income growth rose from 1947-1960 and then fell dramatically by 50 percent from the 1960s to the 1990s. Second, the correlation between consumption growth and personal income growth fell by about 50 percent over the same time period. Finally, the absolute deviation of consumption growth from its mean exhibits one break in U.S. data, and the mean of the absolute deviations has fallen by about 30 percent. First, I …nd that a standard dynamic, stochastic general equilibrium model is unable to explain these facts. Then, I examine the ability of two hypotheses: a fall in credit constraints and changing beliefs about the permanence of income shocks to account for these facts. I …nd evidence for both explanations and the beliefs explanation is more consistent with the data. Importantly, I …nd that estimated changes in beliefs about the permanence of income shocks have signi…cant explanatory power for consumption changes

Topics: JEL Codes, E21, E32, D83 Keywords, Consumption, Business Fluctuations, Learning
Year: 2007
OAI identifier: oai:CiteSeerX.psu:10.1.1.190.7077
Provided by: CiteSeerX
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