The Volatility of Consumption in a Simple General Equilibrium Model

December 1, 1992

Preview Citation

Format: Chicago

Gunnar Tersman. The Volatility of Consumption in a Simple General Equilibrium Model, (USA: International Monetary Fund, 1992) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the volatility of consumption relative to output in the context of a simple general equilibrium model of a small open economy subject to exogenous shocks in productivity. With infinite horizons and exogenous relative prices, the model generates variance estimates that are well above what can be observed in empirical data. While finite horizons and endogenous terms of trade reduce the volatility of consumption, the model fails to generate sufficient serial correlation with respect to the consumption growth rate. If the household’s decision problem is modified to take into account durability and adjustment costs, the model does well on both dimensions.

Subject: Consumption, Employment, Income, International trade, Labor, National accounts, Production, Productivity, Terms of trade

Keywords: Consumption, Consumption composite, Consumption good, Consumption growth rate, Employment, Endogenous terms of trade, Income, Output innovation, Productivity, Terms of trade, Terms of trade movement, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/109
Stock No:

WPIEA1091992
ISBN:

9781451946130
ISSN:

1018-5941

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