Three essays on consumption and geography
Lecznar, Jonathon P.
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This dissertation consists of three essays studying the measurement and behavior of real consumption. The first two essays highlight the importance of accounting for geographic differences in new product entry to accurately measure real consumption using household-level spending data and a model to construct cost-of-living-adjusted price indices. The third essay uses a model of a household’s consumption-savings decision and GMM estimation to examine changes in real consumption’s behavior during a period of significant economic transformation in Japan. The first essay estimates real consumption's growth rate and volatility in light of three new facts documenting geographic differences in consumption: (1) consumers in separate markets buy different products, (2) a product's market share varies geographically conditional on relative price, and (3) product variety growth and its cyclicality varies geographically. These facts suggest that existing methods to account for product variety changes overstate the benefits to consumers by overlooking geographic diversity in consumption baskets. Quantitatively, focusing on aggregate product variety changes overstates real consumption growth by 2.75 percentage points primarily by assuming that local product entry benefits all consumers nationally. Nonetheless, accounting for product variety changes is important. Our real consumption series grows 3 percentage points faster than a statistical agency benchmark and has twice the volatility due to product variety’s procyclicality. The second essay examines how accounting for local product variety changes alters aggregate welfare estimates and our understanding of regional heterogeneity. Concentrating on in-home product spending from 2004-2014, aggregate quarterly consumption-equivalent welfare was 16.20 percent higher than a statistical agency benchmark indicates. However, focusing on aggregate statistics masks large geographic differences that statistical agency methods understate, implying greater real consumption growth inequality across regions than previously believed. The third essay studies the dynamics of consumption, the real interest rate, and measures of labor input in Japan. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the Bank of Japan’s zero interest rate policy and the increase in the consumption tax rate in April 1997. GMM estimation shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions.