Showing papers on "Consumption (economics) published in 1995"

Globalization and the Inequality of Nations

Abstract: The paper considers a model in which an imperfectly competitive manufacturing sector produces goods which are used both for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and the gains from trade? At high transport costs all countries have some manufacturing industry, but when transport costs fall below a critical value a core-periphery pattern forms spontaneously, and nations that find themselves in the periphery suffer a decline in real income. As transport costs continue to fall there comes a second stage of convergence in real incomes, in which the peripheral nations gain and the core nations may well lose.

Income Smoothing and Consumption Smoothing

Abstract: One way that risk-averse households protect consumption levels is to borrow and use insurance mechanisms. Another way, common in low-income economies, is to diversify economic activities and make conservative production and employment choices. Households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance. Typically, both types of mechanisms are studied independently but much more can be learned by studying them together. First, we obtain a more complete picture of risks, costs, and insurance possibilities. Second, it opens the way to considering biases in standard tests of credit and insurance.

The Case of the Missing Trade and Other Mysteries

Abstract: The Heckscher-Ohlin-Vanek (HOV) theorem, which predicts that countries will export products that are made from factors in great supply, performs poorly. However, deviations from HOV follow pronounced patterns. Trade is missing relative to its HOV prediction. Also, rich countries appear scarce in most factors and poor countries appear abundant in all factors, a fact that squares poorly with the HOV prediction that abundant factors are exported. As suggested by the patterns, HOV is rejected empirically in favor of a modification that allows for home bias in consumption and international technology differences. Copyright 1995 by American Economic Association.

Does female income share influence household expenditures? evidence from côte d'ivoire

Abstract: Case studies of African households frequently suggest that the identity of persons earning income affects how that money is spent.' In particular, it is often claimed that relative to women, men spend a greater proportion of the income they earn on goods such as alcohol, cigarettes, status consumer goods, and female companionship'. By contrast, women are more likely to purchase goods for children and for general household consumption.

Tastes and technology in a two-country model of the business cycle: Explaining international

Abstract: Trade on international financial markets allows people to insure country-specific risk and smooth consumption intertemporally. Equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment. The authors incorporate nontraded goods in the model and find that the implications for aggregate consumption, investment, and the trade balance are consistent with business-cycle properties of industrialized countries. However, the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level. Taste shocks produce price-quantity relationships more consistent with the data. Copyright 1995 by American Economic Association.

Is there a retirement-savings puzzle?

Abstract: In this paper we ask whether households are saving enough for their retirement. We use data on income, expenditure and expenditure components to analyse patterns of behaviour at and around the time of retirement. For successive date-of-birth cohorts we compare periods of unemployment to periods of retirement and separate expenditures into categories reflecting work-related expenditures, basic necessities and other goods. We find that income typically falls by more at unemployment than retirement, but the reverse is true for expenditure. We observe falls in expenditure at retirement for all expenditure categories. Using a stochastic life-cycle model including mortality rates we assess the anticipated impact of retirement on consumption against that of unemployment. The inter-relationship between goods and leisure explains a large part of the persistent fall in expenditure at retirement. We argue that the only way in which the life-cycle hypothesis could be reconciled with the remaining unanticipated dip in consumption would be with the systematic arrival of unexpected adverse information at the time of retirement.

Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies

Abstract: The hypothesis of full risk sharing can be taken to data from low-income countries and evaluate formal and informal financial systems. In many contexts, idiosyncratic risks are high, so credit/insurance arrangements could be beneficial. Statistical tests reveal that households in southern India take advantage of these possibilities; villages in Cote d'Ivoire and countries in Thailand do not do as well. The paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems. The full information and mechanism design frameworks provide benchmarks for policy analysis.

The Nature of Precautionary Wealth

Abstract: This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with greater income uncertainty. However, the apparent pattern of precautionary saving is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be less sensitive to uncertainty in permanent income than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the 'buffer-stock' models of saving described in Carroll (1992) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against near term fluctuations in income.

Tax Avoidance and the Deadweight Loss of the Income Tax

Abstract: The traditional method of analyzing the distorting effects of the income tax greatly underestimates its total deadweight loss as well as the incremental deadweight loss of an increase in income tax rates Deadweight losses are substantially greater than these conventional estimates because the traditional framework ignores the effect of higher income tax rates on tax avoidance through changes in the form of compensation (eg, employer paid health insurance) and through changes in the patterns of consumption (eg, owner occupied housing) The deadweight loss due to the increased use of exclusions and deductions is easily calculated Because the relative prices of leisure, excludable income, and deductible consumption are fixed, all of these can be treated as a single Hicksian composite good The compensated change in taxable income induced by changes in tax rates therefore provides all of the information that is needed to evaluate the deadweight loss of the income tax These estimates using TAXSIM calibrated to 1994 imply that the deadweight loss per dollar of revenue of using the income tax rather than a lump sum tax is more than twelve times as large as Harberger's classic estimate A marginal increase in tax revenue achieved by a proportional rise in all personal income tax rates involves a deadweight loss of nearly two dollars per incremental dollar of revenue Repealing the 1993 increase in tax rates for high income taxpayers would reduce the deadweight loss of the tax system by $24 billion while actually increasing tax revenue

Business Cycles and the Asset Structure of Foreign Trade

Abstract: International financial markets are widely believed to be important for the international transmission of business cycles since they determine the extent to which individuals can smooth consumption in the presence of country-specific shocks to income. Using a two-country equilibrium model with restricted asset trade, the authors find that the absence of complete financial integration may not be important if shocks to national economies have low persistence or are transmitted rapidly across countries. However, if shocks are highly persistent or are not transmitted internationally, the extent of financial integration is central to the international transmission of business cycles. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience

Abstract: In earlier work we documented two episodes in which a sharp fiscal consolidation was associated with a surprisingly large expansion in private domestic demand. In this paper we draw on further evidence to investigate if and when fiscal policy changes can have such non-Keynesian effects. In the first part of the paper, we analyse cross-country data for 19 OECD countries. In the second part we concentrate on the Swedish fiscal expansion of the early 1990s. The cross-country evidence on private consumption confirms that fiscal policy changes - both contractions and expansions - can have non-Keynesian effects if they are sufficiently large and persistent. It also suggests that these effects can result not only from changes in public consumption, but to some extent also from changes in taxes and transfers. The latter result is also consistent with the Swedish experience, where a decrease in net taxes (with almost no change in public consumption) was associated with a dramatic fall in private domestic demand. Our evidence and that from other studies agree that during the Swedish fiscal expansion of the early 1990s a large negative error should be interpreted, but it is clear that the most obvious candidates (wealth effects and after-tax real interest rate effects) are not sufficient to explain it. This error may reflect a large downward revision of permanent disposable income, which affected the consumption choices of Swedish households over and beyond the negative effects of the drop in real asset prices. We suggest that this downward revision in permanent disposable income may have been triggered, at least partly, by the fiscal expansion of the early 1990s.

Is consumption growth consistent with intertemporal optimization? Evidence from the consumer expenditure survey

Abstract: In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading.

Waiting time and decision making: is time like money?

Abstract: Time is a resource. As such, consumers have to make decisions regarding their use of time in the purchase and consumption of goods and services. Using prospect theory and mental accounting as theoretical frameworks, this article investigates whether consumers treat time like money when they make decisions. In a series of studies, we found that the value of consumers' time is not constant but depends on contextual characteristics of the decision situation. Our results also suggest that in deterministic situations, people make decisions involving time losses in a manner consistent with the convex loss function proposed by prospect theory. However, in decision making under conditions of risk, people seem to make risk-averse choices with respect to decisions in the domain of time in contrast to the risk-seeking behavior often found with respect to decisions involving losses of money. We discuss the nonfungibility of time as an explanation for the discrepancy between decisions involving time and those involving money.

Government Debt, Government Spending, and Private Sector Behavior: Reply

Abstract: Roger Kormendi (1983) presents apparently strong evidence that, in contrast to the standard view, consumption is not reduced by taxes but is reduced by government expenditure. He interprets his results as supporting a "consolidated" approach to private sector behavior in which consumers effectively internalize the government budget constraint. Specifically, he claims that consumers regard government spending as the true measure of the government's claim on private resources, and so do not respond to changes in taxes, given spending. This is basically the approach advocated by Robert Barro (1974) and known also as the Ricardian Equivalence Proposition (hereafter REP). Kormendi's results appears to contradict other empirical work based on the Life Cycle Hypothesis (for example, Martin Feldstein, 1982; Modigliani 1984a; Sterling, 1985) although results similar to his have been reported (see David Aschauer, 1985; John Seater and Roberto Mariano, 1985 and the references in Kormendi). In our view, Kormendi's analysis is seriously flawed. His heuristic derivation of the consumption function leads him to a specification of the aggregate consumption function, which is not consistent with the Life Cycle Hypothesis (LCH) or with REP, and to questionable methods of estimation. Once his conceptual and methodological errors are corrected, his formulation and, more generally, the REP hypothesis are found to receive little empirical support. In the next section we rely on the LCH to derive an aggregate consumption function which shows explicitly how government expenditure and taxes should effect private consumption. This derivation helps to bring out the observable implications of REP, which are shown to be equivalent to a limiting form of the LCH in which the planning horizon is infinite. It also serves to clarify the appropriate specification of the variables appearing in the consumption function. Next, Section II reports our empirical estimates and tests. Section III compares our results with Kormendi's. Finally, Section IV reports the results of endeavors to improve the specification of fiscal variables, notably by distinguishing between permanent and transitory tax changes.

What Can Explain the Apparent Lack of International Consumption Risk Sharing

Abstract: Recent research in international business cycles based upon complete markets has found that international consumption correlations are lower than predicted by the standard risk-sharing implications of these models. In this paper, I use regression tests to ask whether two different types of explanations can help explain this result. First, I consider whether non-separabilities between tradeables and non-tradeable leisure or goods can explain the puzzle. Surprisingly, non-separabilities explain only a tiny fraction of the variation in tradeables consumption across countries. Furthermore, risk-sharing in tradeables is rejected. Second, I examine the effects of capital market restrictions on aggregate consumption risk-sharing by countries. While rejections of risk-sharing are stronger for countries facing more severe capital market restrictions, risk-sharing is still rejected for the unrestricted group of countries. Therefore, risk-sharing does not appear to be resolved by either explanation alone. However, when I allow for both non-separabilities and certain market restrictions, risk-sharing among unrestricted countries is not rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk-sharing across countries.

Union contracts and the life-cycle/permanent-income hypothesis

Abstract: This paper isolates households in the PSID whose heads can be matched to particular long-term union contracts with high confidence. The author uses use published information on these contracts to construct a household-specific measure of expected wage growth. He finds that predictable wage movements are significantly correlated with consumption changes, contrary to neoclassical consumption theory. The author finds that consumption responds more strongly to predictable income declines than to predictable income increases. This asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion. Copyright 1995 by American Economic Association.

Capital Utilization and Returns to Scale

Abstract: This paper studies the implications of procyclical capital utilization rates for inference regarding cyclical movements in labor productivity and the degree of returns to scale We organize our investigation around five questions that we study using a measure of capital services based on electricity consumption: (1) Is the phenomenon of near or actual short-run increasing returns to labor an artifact of the failure to accurately measure capital utilization rates? (2) Can we find a significant role for capital services in aggregate and industry-level production technologies? (3) Is there evidence against the hypothesis of constant returns to scale? (4) Can we reject the notion that the residuals in our estimated production functions represent technology shocks? (5) How does correcting for cyclical variations in capital services affect the statistical properties of estimated aggregate technology shocks? The answer to the first two questions is yes The answer to the third and fourth questions is no The ans

Consumption over the life-cycle and over the business-cycle

Abstract: The main aim of this paper is to assess the validity of the life cycle model of consumption. In particular, we address an issue that has recently received much attention, especially in the macroeconomic literature: that of "excess sensitivity" of consumption growth to income growth. We do this using a time series of cross sections and a novel and flexible parameterization of preferences. The former allows us to' address aggregation issues directly, while with the latter we can allow both the discount factor and the elasticity of intertemporal substitution eis to be affected by various observable variables and lifetime wealth. The main findings can be summarized as follows: (i) the excess sensitivity of consumption growth to labor income disappears when we control for demographic variables. This is true both at life cycle and business cycle frequencies. (ii) estimation of a flexible specification of preferences indicates that the elasticity of intertemporal substitution is a function of several variables, including the level of consumption. The eis increases with the level of consumption, as expected. (iii) the variables that change the eis are also important in explaining why we observe excess sensitivity over the business cycle. (iv) we are able to reconcile our results with those reported both in the macro and micro literature. (v) in our specification the elasticity of intertemporal substitution is not very well determined. This result, however, should be taken with care, as we have not made an effort to construct a 'preferred' specification, which would probably include additional controls for labor supply behavior. The evidence presented shows that the life cycle model cannot be easily dismissed. Indeed, we believe that the model does a good job at representing consumption behavior both over the life cycle and over the business cycle.

Globalization and the Inequality of Nations

Abstract: The paper considers a model in which an imperfectly competitive manufacturing sector produces goods which are used both for final consumption and as intermediates Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration How does globalization affect the location of manufacturing and the gains from trade? At high transport costs all countries have some manufacturing industry, but when transport costs fall below a critical value a core-periphery pattern forms spontaneously, and nations that find themselves in the periphery suffer a decline in real income As transport costs continue to fall there comes a second stage of convergence in real incomes, in which the peripheral nations gain and the core nations may well lose

Stock ownership patterns, stock market fluctuations, and consumption

Abstract: The market value of corporate stock in the United States increased by nearly one trillion dollars between December 1994 and July 1995. This paper explores the distribution of the stock ownership, and hence the gains from the stock price rise, and what the rise in stock prices implies for consumer spending.(This abstract was borrowed from another version of this item.)

Market Frictions and Consumption-Based Asset Pricing

Abstract: A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.

Prices, credit markets and child growth in low-income rural areas*

Abstract: In this paper it is argued that fluctuations in child growth in rural areas of Bangladesh during and after severe floods in I988 can provide insight into the structure of credit markets. A model of intertemporal resource allocation is developed and Euler equations relating growth patterns of children to the cost of borrowing by household are then derived from the model. The evidence indicates that although some of the variation in growth patterns over the relevant period may be attributed to variation in illness and the price of rice, growth patterns for children in landless households were influenced by credit market imperfections. This paper links two prominent strands of research in economic development. The first strand examines the extent to which households in poor rural economies are able to protect themselves from the adverse weather and other shocks that importantly influence earnings in underdeveloped areas. While it has long been thought that credit market imperfections and other forms of market failure make it difficult for poor individuals in these economies to smooth consumption both within and across years, there remains some question about the magnitude and pervasiveness of these imperfections. While there is evidence that fluctuations in economic conditions result in inefficient allocation of resources (e.g. Morduch, 1990; Rosenzweig and Wolpin, I993), some recent papers have emphasised the fact that consumption patterns of households in the same village comove in a manner consistent with the idea that a substantial fraction of idiosyncratic variation in income is effectively

The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach

Abstract: According to the consumption-smoothing view, a high degree of capital mobility implies that agents are able to fully smooth their consumption in the face of shocks This article develops aframework to test whether, indeed, the current account in developing countries acts as a buffer to smooth consumption in the face of shocks to national cash flow, which is defined as output less investment less government expenditure Using vector autoregression analysis, we estimate the optimal consumption-smoothing current account with data from a sample of forty-five developing countries We find that for a majority of the countries, the hypothesis offull consumption smoothing cannot be rejected, suggesting that capital mobility may after all be quite high in this group of countries

The Ingenuity Gap: Can Poor Countries Adapt to Resource Scarcity?

Abstract: THE EARTH'S CURRENT human population of 5.7 billion is growing by 1.6 percent a year. On a global average, real economic product per capita is also growing at 1.5 percent a year. These increases combine to boost the globe's total economic product by about 3 percent annually. Extrapolation therefore suggests that today's global product of US$25 trillion will exceed $50 trillion in today's dollars by 2020. A large portion of this doubling of world product, should it occur, will be achieved through increased consumption of the planet's natural resources, including nonrenewables like petroleum and ores, and renewables like cropland, forests, fresh water, and fisheries. Already, we are causing major changes in these resources: "transformed, managed, and utilized ecosystems constitute about half of the ice-free earth; human-mobilized material and energy flows rival those of nature" (Kates, Turner, and Clark 1990: 13). Such changes are certain to grow in magnitude because of the rapidly increasing scale of economic activity. Increased resource consumption can cause resource scarcities, and scarcities impose costs on societies. But experts debate the severity of future scarcities and human capacity to adapt to them. There are three main positions in this debate (see, e.g., Barbier 1989; Matthaei 1984). NeoMalthusians, who are often biologists or ecologists, claim that finite natural resources place strict limits on the growth of human population and consumption; if these limits are exceeded, poverty and social breakdown result. Many neoclassical economists, in contrast, say that there need be few, if any, strict limits to human population, consumption, and prosperity.' Properly functioning economic institutions, especially markets, provide incentives to encourage conservation, resource substitution, development of new stores of scarce resources, and technological innovation.2 Finally, analysts whom I call "distributionists" acknowledge that there may

Household Saving: Micro Theories and Micro Facts

Abstract: In this survey, we review the recent theoretical and empirical literature on household saving and consumption. The discussion is structured around a list of motives for saving and how well the standard theory captures these motives. We show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model. Particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior. We also discuss the "behavioral" or "psychological" approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving. We provide a section on facts: who save and how much. We then discuss informally the recent decline in the U.S. saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time. We do not find any convincing explanation for the change in saving rates. We also discuss some analyses of saving behavior over the life-cycle, addressing such questions as whether households save "enough" for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model. We also review a great number of studies of the consumption Euler equations. Based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income. We also examine in depth the recent empirical literature on the precautionary motive. We conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle, this motive is not so strong empirically as some investigators suggest.