Three Essays in Applied Economics on Household Consumption

Abstract

This dissertation consists of three essays in applied economics on household consumption. Common to each essay is the use of aggregate data. Understanding how economic theory and model of household consumption are employed for different goods and services around the whole world, and what factors determine household consumption and expenditure, is critical for developing policies to improve consumer wellbeing and economic growth. In the first study, we revisit this issue with rural area household data in China during the post economic reform regime (1978-2009) as well as the postwar US data for comparison. The in-sample analysis provides strong evidence against the Permanent Income Hypothesis (PIH) for both countries. Out-of-sample forecast exercises also reveal that consumption changes are highly predictable. The vector autoregressive (VAR) model analysis also shows significantly positive responses of consumption to income shocks, and non-negligible proportions of variations in consumption are explained by innovations in income. The second study empirically investigates potential effects of economic recessions on consumer’s decision making process for recreational activities using the Consumer Expenditure Survey (CES) data during the Great Recession. I employ the Probit model to study the propensity of making non-zero expenditures on entertainment activities. I also use the Tobit model to correct for the bias from using the ordinary least squares (OLS) method in presence of censored observations. I find overall significantly negative effects of recessions either through decreases in intercept or in the income coefficient estimates. ii In the third study, I revisit the work of Edelstein and Kilian (2009) who point out that the oil price shock involves a reduction in consumer spending, which results in a decrease in the demand for goods and services. The present study empirically evaluates this argument by investigating effects of the oil price shock on six CPI sub-indices in the US. I find substantial decreases in the relative price in less energy-intensive sectors, but not in energy-intensive sectors. The findings are consistent with those of Edelstein and Kilian (2009) in the sense that spending adjustments play an important role in price dynamics.