Macro Fluctuations and Consumption Behavior: The Empirical Evidence in the Long-Run

Abstract

This study contributes to the longstanding issue regarding the influence of macroeconomic fluctuations on long-term consumption prospects. Specifically, we employ Penn World Table (PWT) data and Euler restrictions to provide conservative lower bound estimates for an ARDL model of consumption behavior under risk across 183 countries from 1970 to 2019. The key finding of our study emphasizes a significant association, on average and ceteris paribus, between aggregate permanent risk and consumption behavior. This leads to "extra savings," which, in turn, have permanent negative effects on welfare, particularly for the poorest countries. Nonetheless, this empirical evidence cannot refute Lucas’s (1987) intuition regarding the low value of stabilization policies.

Keywords: consumption behavior, macro fluctuations, precautionary saving, ARDL model, developing countries