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Barcelona GSE Working Paper No. 646

Title: Consumption Heterogeneity over the Business Cycle
Authors: Giacomo de Giorgi, Luca Gambetti
Date: 25-06-2012
Keywords: Consumption, Heterogeneity, Aggregate Shocks, Structural Factor Model, FAVAR
JEL Codes: E21, E63, D12, C3
Abstract:
We study consumption heterogeneity over the business cycle. Using household panel data from 1984 to 2010 in the US we find that the welfare cost of the business cycle is non-negligible, once agents heterogeneity is taken into account, and sums to about 1% of yearly consumption. This is due to the structure of comovements between the different parts of the consumption distribution, in particular the tails are highly volatile and negatively related to each other. We also find that business cycle fluctuations originating from exogenous financial shocks only hit the top end of the consumption distribution and therefore reduce consumption inequality.
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