Public Expenditure and Consumption Volatility
Recent estimates of the welfare cost of consumption volatility find that it is significant in developing nations, where it may reach an equivalent of reducing consumption by 10 percent per year. Hence, examining the determinants of consumption vola...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/05/9473628/public-expenditure-consumption-volatility http://hdl.handle.net/10986/6692 |
| Summary: | Recent estimates of the welfare cost of
consumption volatility find that it is significant in
developing nations, where it may reach an equivalent of
reducing consumption by 10 percent per year. Hence,
examining the determinants of consumption volatility is of
utmost relevance. Based on cross-country data for the period
1960-2005, the paper explains consumption volatility using
three sets of variables: one refers to the volatility of
income and the persistence of income shocks; the second set
of variables refers to policy volatility, considering the
volatility of public spending and the size of government;
while the third set captures the ability of agents to smooth
shocks, and includes the depth of the domestic financial
markets as well as the degree of integration to
international capital markets. To allow for potential
endogenous regressors, in particular the volatility of
fiscal policy and the size of government, the system is
estimated using the instrumental variables method. The
results indicate that, besides income volatility, the
variables with the largest and most robust impact on
consumption volatility are government size and the
volatility of public spending. Results also show that deeper
and more stable domestic financial markets reduce the
volatility of consumption, and that more integrated
financial markets to the international capital markets are
associated with lower volatility of consumption. |
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