Working Paper: NBER ID: w9196
Authors: Jonathan A. Parker; Bruce Preston
Abstract: This paper uses data on the expenditures of households to explain movements in the average growth rate of consumption in the U.S. from the beginning of 1982 to the end of 1997. We propose and implement a decomposition of consumption growth into series representing four proximate causes. These are new information, and three causes of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Incomplete markets for trading consumption in future states leads to statistically significant and countercyclical movements in expected consumption growth. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.
Keywords: Precautionary Saving; Consumption Growth; Household Expenditures
JEL Codes: E21; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary saving (D14) | fluctuations in expected consumption growth (E20) |
| incomplete markets for consumption insurance (D52) | countercyclical movements in expected consumption growth (E20) |
| precautionary saving (D14) | consumption dynamics (E21) |
| expected consumption growth due to precautionary savings (E21) | higher following economic downturns (E32) |
| precautionary saving (D14) | growth due to the real interest rate (O42) |
| precautionary saving (D14) | growth due to shifts in preferences (O49) |
| real interest rate (E43) | growth due to precautionary saving (E21) |