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Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption

  • Emmanuel De Veirman and Ashley Dunstan
Published/Copyright: July 26, 2011
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 11 Issue 1

This paper studies the importance of intertemporal substitution in consumption for the cyclical co-movement of consumption, net worth and income. We can largely explain the empirical hump-shaped consumption response to a transitory wealth increase by allowing for time-varying returns in an otherwise standard Permanent Income Hypothesis (PIH) model. At the net worth peak, households bring consumption forward in anticipation of low returns on saving. The PIH model fully explains the empirical response when households initially expect the net worth shock to be permanent, but gradually learn that it is in fact transitory.

Keywords: Permanent Income Hypothesis; time-varying returns; intertemporal substitution effect
Published Online: 2011-7-26

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

Articles in the same Issue

  1. Advances Article
  2. Trend Agnostic One-Step Estimation of DSGE Models
  3. Contributions Article
  4. Human Capital, Technology Adoption and Development
  5. Optimal Monetary Policy and Social Insurance in a Small Open Economy
  6. Estimated Interest Rate Rules: Do they Determine Determinacy Properties?
  7. Cyclical Upgrading of Labor and Employment Differences across Skill Groups
  8. Short-Run and Long-Run Effects of Banking in a New Keynesian Model
  9. Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes
  10. Private Equity Premium and Aggregate Uncertainty in a Model of Uninsurable Investment Risk
  11. Economic Development and Heterogeneity in the Great Moderation among the States
  12. Social Security, Differential Fertility, and the Dynamics of the Earnings Distribution
  13. The Quality of Public Investment
  14. House Price Growth, Collateral Constraints and the Accumulation of Homeowner Debt in the United States
  15. The "Elusive" Capital-User Cost Elasticity Revisited
  16. Asset Pricing and Housing Supply in a Production Economy
  17. Fiscal Calculus and the Labor Market
  18. The Price of Egalitarianism
  19. Topics Article
  20. How Costly is CPI Inflation Targeting: A Two Sector Model with No Labor Mobility
  21. Cyclical Behavior of a Matching Model with Capital Investment
  22. The Cost Channel, Indeterminacy, and Price-Level versus Inflation Stabilization
  23. Monetary Policy Shocks and Risk Premia in the Interbank Market
  24. Slow-Moving Traps
  25. An Alternative Method for Measuring Financial Frictions
  26. Bubbles and Self-Fulfilling Crises
  27. Structural Breaks and the Fisher Effect
  28. Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad
  29. Trade Liberalization, Competition and Growth
  30. The Dynamic Relationship between Inflation and Output Growth in a Cash-Constrained Economy
  31. Inflation Nutters? Modelling the Flexibility of Inflation Targeting
  32. Does Insurance Matter for Growth: Empirical Evidence from OECD Countries
  33. 28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession
  34. Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption
  35. Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy
  36. How the Housing and Financial Wealth Effects Have Changed over Time
  37. Technology Shocks and Employment: Evidence from U.S. Firm-Level Data
  38. Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach
  39. Alternative Perspectives on Optimal Public Debt Adjustment
  40. Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks
  41. Sector-Specific Markup Fluctuations and the Business Cycle: A Cross-Country Analysis
  42. External Debts and Current Account Adjustments
  43. Welfare Implications of Regional Asymmetries in a Monetary Union
  44. News Shocks and the External Finance Premium
  45. Interest Rates and Real Business Cycles in Emerging Markets
https://doi.org/10.2202/1935-1690.1958
Keywords for this article
Permanent Income Hypothesis; time-varying returns; intertemporal substitution effect

Articles in the same Issue

  1. Advances Article
  2. Trend Agnostic One-Step Estimation of DSGE Models
  3. Contributions Article
  4. Human Capital, Technology Adoption and Development
  5. Optimal Monetary Policy and Social Insurance in a Small Open Economy
  6. Estimated Interest Rate Rules: Do they Determine Determinacy Properties?
  7. Cyclical Upgrading of Labor and Employment Differences across Skill Groups
  8. Short-Run and Long-Run Effects of Banking in a New Keynesian Model
  9. Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes
  10. Private Equity Premium and Aggregate Uncertainty in a Model of Uninsurable Investment Risk
  11. Economic Development and Heterogeneity in the Great Moderation among the States
  12. Social Security, Differential Fertility, and the Dynamics of the Earnings Distribution
  13. The Quality of Public Investment
  14. House Price Growth, Collateral Constraints and the Accumulation of Homeowner Debt in the United States
  15. The "Elusive" Capital-User Cost Elasticity Revisited
  16. Asset Pricing and Housing Supply in a Production Economy
  17. Fiscal Calculus and the Labor Market
  18. The Price of Egalitarianism
  19. Topics Article
  20. How Costly is CPI Inflation Targeting: A Two Sector Model with No Labor Mobility
  21. Cyclical Behavior of a Matching Model with Capital Investment
  22. The Cost Channel, Indeterminacy, and Price-Level versus Inflation Stabilization
  23. Monetary Policy Shocks and Risk Premia in the Interbank Market
  24. Slow-Moving Traps
  25. An Alternative Method for Measuring Financial Frictions
  26. Bubbles and Self-Fulfilling Crises
  27. Structural Breaks and the Fisher Effect
  28. Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad
  29. Trade Liberalization, Competition and Growth
  30. The Dynamic Relationship between Inflation and Output Growth in a Cash-Constrained Economy
  31. Inflation Nutters? Modelling the Flexibility of Inflation Targeting
  32. Does Insurance Matter for Growth: Empirical Evidence from OECD Countries
  33. 28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession
  34. Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption
  35. Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy
  36. How the Housing and Financial Wealth Effects Have Changed over Time
  37. Technology Shocks and Employment: Evidence from U.S. Firm-Level Data
  38. Monetary Policy Transmission under Zero Interest Rates: An Extended Time-Varying Parameter Vector Autoregression Approach
  39. Alternative Perspectives on Optimal Public Debt Adjustment
  40. Policy Distortions and Aggregate Productivity: The Role of Idiosyncratic Shocks
  41. Sector-Specific Markup Fluctuations and the Business Cycle: A Cross-Country Analysis
  42. External Debts and Current Account Adjustments
  43. Welfare Implications of Regional Asymmetries in a Monetary Union
  44. News Shocks and the External Finance Premium
  45. Interest Rates and Real Business Cycles in Emerging Markets
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