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  5. The Consumption Origins of Business Cycles: Lessons from Sectoral Dynamics

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

The Consumption Origins of Business Cycles: Lessons from Sectoral Dynamics

  • Christian Matthes
  • Felipe Schwartzman
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

We measure the impact of household consumption shocks on aggregate fluctuations. These shocks affect household consumption directly, and production and prices indirectly through their impact on aggregate consumption. We show how to identify such shocks using prior knowledge of their differential impact across sectoral variables. Shocks independently affecting household consumption demand have accounted for around 40% of business cycle fluctuations since the mid-1970s, playing a central role in recessions within that period. The inferred household consumption shock series correlates well with measures of changes in consumer confidence and household wealth.

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