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Vincenzo Merella (Università di Cagliari)

9 November 2011 @ 12:45

 

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Date:
9 November 2011
Time:
12:45
Event Category:
Event Tags:

“Sectoral Shocks and Asset Pricing: The Role of Consumer Confidence”

(Note: the seminar is on Wednesday)

Abstract

This paper proposes a theory for the observed relationship between consumer confidence and consumption growth. The idea is thatindicators of confidence identify information on the structure of consumer spending that is not contained in other data. We construct amultisectoral economy with two fundamental features. First, a technology shock impacts production in each sector. Second, priceelasticity of demand is heterogeneous across sectors. As a result, different distributions of realised shocks generate differentconsumption bundle compositions and different consumer price index (CPI) levels. Ceteris paribus, volatility of consumption growth in ourmodel is higher than that predicted by a benchmark model (Lucas-tree with homogeneous sectoral elasticities). We show that innovations inthe consumer confidence index helps in identifying the additional volatility generated by our model, and test our theory empirically byembedding the model into an asset pricing framework. The calibrated model eliminates the equity premium puzzle, a finding also confirmedby a GMM estimation.