UCL Department of Economics


Macro Seminar - David Baqaee (UCLA)

30 November 2023, 12:00 pm–1:30 pm

Books in library

Measuring Forward-Looking Welfare: A Sufficient Statistics Approach

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Alan Olivi

Abstract: We provide a method to measure forward-looking consumer welfare, in money metric terms, without imposing parametric assumptions about beliefs or the utility function beyond time separability. Forward-looking consumer welfare takes into account beliefs about the future. Our methodology allows for non-rational expectations, nonhomotheticities (within and across time), uninsurable risk, incomplete markets, and borrowing constraints and does not require us to estimate beliefs, contingent plans, or any parameters of the utility function besides the intertemporal elasticity of substitution. Our method requires goods’ prices over time and repeated cross-sectional household expenditures, financial wealth, and income data. We apply our method to the Panel Study of Income Dynamics from the United States, and use our results to study growth and inflation between 2005 and 2015. We find that forward-looking measures of welfare growth tend to be markedly higher than standard static measures like real consumption growth. Our methodology is well-suited to studying the welfare consequences of complex shocks that affect households along different margins and time horizons. As an example, we study the welfare effect of job loss and find that involuntary job loss is associated with a 12% reduction in money metric utility.

Location: Gordon Square (31-34) & (14) Taviton St, Lecture Theatre 612