Tuesday, September 26, 2023
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Calling on graduate students from the 1980s…

I found this Bloomberg article About the pandemic-related depletion of interest savings and the coming consumer interest collapse.

First, it is consistent with general comments about U.S. consumer behavior.look Jane GreenA recent assessment of excess savings. In this explanation, a return to pre-pandemic trends in consumption occurs through diversion.

figure 1: Total consumption in billions of U.S. dollars. Seasonally adjusted rate for 2012 (blue), and deterministic trend line for 2016-19 (red). NBER-defined recession peak-to-trough dates are in gray. Source: BEA, NBER, and author’s calculations.

Second, the idea that excess savings will disappear within a few years is inconsistent with consumption that follows random walk theory. Remember, risk-neutral (or at least certainty-equivalent) consumers who are not subject to liquidity constraints should spend only a fraction of their temporary windfall. Consumption flows (unlike consumption expenditures) should roughly follow a random walk. This is the first log difference in the sum of consumer spending on services and nondurable goods.

figure 2: First difference in the logarithm of the sum of consumption of services and nondurable goods, in billions of 2012 SAAR (blue). NBER-defined recession peak-to-trough dates are in gray. Source: BEA, NBER, and author’s calculations.

Of course, it is understandable that service consumption has been hampered by the epidemic and has turned to tradable goods. Changes in interest rates also affect consumption growth (although often the measured changes are too small).

Interestingly, spending in recent months does not appear to be a random walk.

Technically one cannot reject that the first difference over the past two years is white noise, although 24 observations means this is a fairly low-power test.

In any case, the depletion of “excess savings” is inconsistent with this simple model.

The explanation I prefer is the consumer’s rule of thumb (Mankiw-Romer). The presence of liquidity-constrained consumers is also a possible explanation. However, liquidity constraints do not explain why excess savings are spent (since liquidity-constrained agents should be able to save).

Regardless, we seem to be moving away from Euler’s equations/consumption following the random walk model we learned in grad school in the 1980s…

By the way, if we are right that consumption follows a random walk, then recent increases in consumption suggest that agents have revised their views of future income upwards…




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