Consumption Heterogeneity over the Business Cycle

• Authors: Luca Gambetti and Giacomo De Giorgi.
• BSE Working Paper: 110133 | September 15
• Keywords: heterogeneity , Structural factor model , consumption , aggregate shocks , FAVAR
• JEL codes: E21, E63, D12, C3
• heterogeneity
• Structural factor model
• consumption
• aggregate shocks
• FAVAR

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.