02294cam a22002657 4500001000700000003000500007005001700012008004100029100001900070245014000089260006600229490004200295500001400337520108300351530006101434538007201495538003601567690008501603690008901688690005701777710004201834830007701876856003801953856003701991w11297NBER20140827163649.0140827s2005 mau||||fs|||| 000 0 eng d1 aReis, Ricardo.14aThe Time-Series Properties of Aggregate Consumptionh[electronic resource]:bImplications for the Costs of Fluctuation /cRicardo Reis. aCambridge, Mass.bNational Bureau of Economic Researchc2005.1 aNBER working paper seriesvno. w11297 aMay 2005.3 aWhile this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE32 - Business Fluctuations • Cycles2Journal of Economic Literature class. 7aE21 - Consumption • Saving • Wealth2Journal of Economic Literature class. 7aE60 - General2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w11297.4 uhttp://www.nber.org/papers/w1129741uhttp://dx.doi.org/10.3386/w11297