Essays on consumption and inflation

This dissertation presents three independent papers on macroeconomics. The first chapter, Durable Goods and Liquidity Constraints, studies how the presence of liquidity constraints affects the behavior of aggregate non-durable and durable expenditures in a model with transaction costs. The analysis shows that optimal consumption of non-durable goods in a model with durable goods differs from optimal consumption of non-durable goods in the standard model without durables. In particular, this chapter shows that allowing for durable goods in a model with liqiuidity constraints implies that non-durable goods consumption exhibits less excess sensitivity to current income while durable goods expenditures exhibits greater sensitivity.; The second chapter, Stock Market Fluctuations and Consumer Spending, studies the relationship between stock market returns and consumption growth. Substantial market swings (and, in particular, a collapse in the stock market) may cause consumer spending-and hence aggregate demand-to fluctuate sharply. By decomposing the unexpected shock to stock returns into permanent and transitory components, this chapter analyzes in detail how the stock market affects consumption growth. Empirical results show that there is a different effect on consumption spending depending on the source of the stock market fluctuations. For total consumption growth, the effect of a permanent shock to the stock market return is twice the effect of a transitory shock. In addition, the magnitude of the effect of both shocks is largest for consumption of durables.; The third chapter, Why Does Inflation Differ Across Countries ?, attempts to explain the differences in inflation performance across countries. Earlier research has examined this topic, but it has considered only some of the factors that might be empirically important determinants of inflation rates. This chapter considers the distaste for inflation, optimal tax considerations, time consistency issues, distortionary non-inflation policies, and other factors that might be empirically important determinants of inflation performance. Overall, the results suggest that institutional arrangements—central bank independence or exchange rate mechanisms—are relatively unimportant determinants of inflation performance, while economic fundamentals—openness and optimal tax considerations—are relatively important determinants.