Working Paper: CEPR ID: DP10319
Authors: Giacomo De Giorgi; Luca Gambetti
Abstract: This paper sheds new light on the interactions between business cycles and the consumption distribution. We use CEX consumption data and a factor model to characterize the cyclical dynamics of the consumption distribution. We first establish that our approach is able to closely match business cycle fluctuations of consumption from the National Account. We then study the responses of the consumption distribution to TFP shocks and economic policy uncertainty shocks. Importantly, we find that the responses of the right tail of the consumption distribution, mostly comprising higher educated individuals, to shocks that drive cyclical fluctuations are larger and quicker than in other parts of the distribution. We note that the cost of business cycle fluctuations is larger than the one found using aggregate consumption, and that the shocks we analyze reduce consumption inequality on impact.
Keywords: consumption; inequality
JEL Codes: C3; D12; E21; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic shocks (F41) | common component of aggregate consumption (E20) |
| TFP shocks (F16) | consumption deciles (D12) |
| economic policy uncertainty shocks (E39) | consumption deciles (D12) |
| TFP shocks (F16) | top decile of consumption distribution (D39) |
| economic policy uncertainty shocks (E39) | top decile of consumption distribution (D39) |
| macroeconomic conditions (E66) | consumption patterns (D10) |
| TFP shocks (F16) | consumption inequality (D31) |
| economic policy uncertainty shocks (E39) | consumption inequality (D31) |