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CREDIT CONSTRAINTS, LEARNING, AND AGGREGATE CONSUMPTION VOLATILITY

Published online by Cambridge University Press:  07 June 2012

Daniel L. Tortorice
Daniel L. Tortorice*
Affiliation:
Brandeis University
*
Address correspondence to: Daniel L. Tortorice, Department of Economics, Brandeis University, Mailstop 021, 415 South St., Waltham, MA 02454-9110, USA; e-mail: tortoric@brandeis.edu.
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Abstract

This paper documents three facts. First, the volatility of consumption growth relative to income growth rose from 1947 to 1960 and then fell dramatically by 50% from the 1960s to the 1990s. Second, the correlation between consumption growth and personal income growth fell by about 50% 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%. A standard dynamic stochastic general equilibrium model is unable to explain these facts. I examine ability of two hypotheses to account for these facts: a fall in credit constraints and changing beliefs about the permanence of income shocks. I find evidence for both explanations. The beliefs explanation is more consistent with the data.

Keywords

ConsumptionBusiness FluctuationsLearningLiquidity Constraints
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 338 - 368
Copyright
Copyright © Cambridge University Press 2012 

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