Empir Econ (2012) 42:915–927DOI 10.1007/s00181-010-0444-x

How important is the stock market wealth effecton consumption in India?

Bhupal Singh

Received: 23 April 2010 / Accepted: 30 September 2010 / Published online: 16 December 2010© Springer-Verlag 2010

Abstract We examine how shocks emanating from changes in the stock wealthaffect the consumption demand in India using a Bayesian VAR framework. The effectof the stock market wealth shock on consumption demand in India is relatively smallin magnitude. The estimates suggest that a 10% increase in the real stock wealth raisesthe consumption demand by 0.3%, which seems to be consistent with some empiricalestimates for the emerging market economies given a relatively low share of stockwealth in the household asset portfolio and its asymmetric distribution. The stockmarket wealth effect being short run in nature does not have a large and persistenteffect on consumption demand since consumers may not perceive the changes in thestock wealth to cause a permanent shift in their wealth.

Keywords Consumption · Stock markets · Financial wealth · Bayesian VAR

JEL Classification C11 · E21 · E30 · G1

1 Introduction

Understanding the nature of household wealth effect and its effects on consumptionis important from the viewpoint of aggregate demand management and the conductof macroeconomic policies. Over the last few decades asset prices have substantially

The views expressed in the paper are those of the author and do not represent the views of the ReserveBank of India.

B. Singh (B)Department of Economic and Policy Research, Reserve Bank of India, Shahid Bhagat Singh Road,Mumbai 400001, Indiae-mail: bhupal@rbi.org.in; bhupalsingh1@gmail.com

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raised household financial wealth in several developed and emerging market econo-mies (EMEs).1 A rapid increase in housing and stock market wealth of households inthe US, other advanced economies and some EMEs is believed to have significantlycontributed to the consumption boom in recent years. From a policy perspective, ashouseholds diversify their portfolios into equities, the asset price channel of mone-tary transmission could strengthen because wealth effect becomes more important.Thus, a clear understanding of the nature and magnitude of wealth effect on consump-tion demand assumes significance for policy makers in assessing the effectivenessof the countercyclical demand management measures. The sharp downturn in stockprices and delinquencies in the housing mortgage markets since 2008, particularly inthe advanced economies, have raised concerns about the significant negative wealtheffect on consumption demand in the world economy. It could be argued that for theEMEs the negative effect of a decline in housing prices has been of relatively lowmagnitude, perhaps due to less developed mortgage markets, relatively low access tofinance, lower household financial leverage and higher demand for residential prop-erties for self living. It is, however, also believed that the sharp downturn in stockprices and substantial erosion of household financial wealth might have, to someextent, impacted the consumption demand. This concern assumes importance fromthe viewpoint of slowdown in domestic consumption demand in several EMEs and itsspill over effects on investment demand and the implications for the macroeconomicmanagement.

In the Indian context, some believe that the boom in consumer spending during2003–2008 was significantly induced by stock market wealth increases as the house-hold participation in stock market increased and the market capitalisation witnessedsubstantial rise. Similarly, the contraction in domestic consumption demand in theaftermath of the global financial crisis is believed to have been significantly con-tributed by a sharp erosion of household financial wealth and expectations of lowerfuture income. These claims, however, are not backed by any empirical research. Thekey question we attempt to address in this paper is how significant is the shock aris-ing from changes in the stock market wealth on consumption demand in India? Doincome effects still explain a large part of household consumption demand in India?These issues, significant from the point of view of their relevance for the demandmanagement policies, are analysed in the following sections.

2 Stock market wealth effect: analytical underpinnings

2.1 Literature

The life cycle theory of consumption provides the basic framework to analyse the phe-nomenon of wealth effect and its impact on consumption (see Ando and Modigliani1963; Friedman 1957), where consumption is determined by households’ current and

1 Household wealth comprises financial and non-financial wealth. Financial wealth constitutes of equities,bonds, bank deposits and investment in insurance and pension funds. Non-financial wealth includes realestate, consumer durables and other tangible assets.

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expected future income and the stock of wealth they hold.2 Wealth can affect house-hold consumption through two channels; first, households can finance consumptionby selling assets, and second, they can increase their spending by borrowing usingthe assets as collateral. Asset prices also contain information about future movementsin real variables (Christoffersen and Sløk 2000); a decline in stock prices leads toincreased uncertainty about future income, i.e., a decline in consumer confidence and,therefore, a decline in durable consumption (Romer 1990). Thus, growth in asset pricessignals higher growth in household income and hence a rise in consumption demandand vice versa. In most empirical studies on wealth effect in the advanced economies,two types of wealth are used, i.e., equity wealth and other wealth, which also includeshousing wealth. Bosworth (1975), Hall (1978), Starr-McCluer (1998) and Ludvigsonand Steindel (1999) argue that movement in stock prices may have different effects onconsumption depending on whether they are driven by changes in the expected profitsor the changes in discount rates.

Ludwig and Sløk (2002) have identified the following key transmission conduitsthrough which changes in stock market wealth could impact household consump-tion. First, the realised wealth effect occurs if the value of consumers’ stock holdingincreases and consumers realise their gains, leading to an increase in consumption.Second is the unrealised wealth effect, where by an increase in stock prices can alsohave an expectation effect as the value of stocks in pension and other captive accountsincreases. Although consumers may not realise these gains, the expectation of a rise infuture income and wealth drives the present consumption. Third is the liquidity effect,where by an increase in stock prices raises investor portfolio, which in turn enhanceshis capacity to borrow against such collateral to finance consumption. Fourth, changesin equity prices may also indirectly affect the consumption of households who do notparticipate in stock market, as there could be spillover effects from higher wealth ofstock owning households.

Most empirical work on the effect of stock wealth on consumption is confinedto the advanced economies as the ownership in equity market is relatively dispersedand hence stock market wealth effect has important implications for consumptiondemand.3 For industrialised countries, a number of empirical analyses confirm thisbasic link but the evidence remains somewhat mixed across countries. Recent studiesfor the United States suggest that one dollar increase in stock market wealth leads to anadditional spending of 4–7 cents (e.g., Davis and Palumbo 2001; Gale and Sabelhaus1999; Kiley 2000). Ludvigson and Steindel (1999), however, argue that such estimatesare sensitive to the choice of sample period and the relationship between stock marketwealth and private consumption appears to be unstable. The estimates of stock marketwealth effects on consumption demand for a 10% change in equity prices range from0.15–0.30% in Japan, 0.1–0.3% in various European countries and 0.3–0.7% in the

2 It postulates that people borrow against future earnings during their early working life when income islow, save during their most productive working years and run down their assets for consumption during oldage. Thus, a person would smooth the benefit of appreciation in wealth by increasing consumption by afraction of the change in the value of the asset and maintain a new level of consumption and vice versa.3 It is argued that a stock market boom may increase consumption pressures, whereas a decline in stockmarket wealth may either contribute to a slowdown in economic activity or accelerate an existing slowdown(e.g., Deaton 1992; Poterba 2000).

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United States (International Monetary Fund 2002; Ludwig and Sløk 2004; Slacalek2006).4 The wide variation in the consumption wealth effect is attributed to differ-ences in the stock ownership pattern relative to other financial assets and the structureof financial markets.5

The issue of consumption wealth effect remained a peripheral area in the macroeco-nomic analysis for the developing countries due to less developed equity and housingmarkets and low and concentrated ownership of households in such types of assets.With the increased openness and significant growth of real estate and stock marketsin many EMEs during the last two decades and consequently the market capitalisa-tion exceeding 100% of GDP for some of the economies and stock ownership gettingmore dispersed, the wealth effect has assumed significance in terms of its impact onconsumption demand. Funke (2004), using a panel of 16 emerging markets, presentedsome evidence of a small but statistically significant stock market wealth effect. Hefound that over a 3-year period a 10% increase in stock prices leads to a 0.2–0.4%increase in private consumption.

2.2 Consumption wealth effect dynamics in India

Empirical work on analysing the wealth effect on consumption in many developingeconomies including India is constrained by the availability of data on householdwealth. In India, while data on equity holdings of the household and equity prices areavailable, there is a lack of data on the housing wealth. Housing wealth in India istypically to be seen in conjunction with the fact that houses are predominantly for selfoccupancy and most buyers tend to be the first time home owners. Furthermore, unlikeadvanced economies, home equity loans arising from household’s ability to refinancemortgage is not prevalent in India due to lack of a developed mortgage market. Thisconstraints the ability of house owners to finance their consumption, particularly in adeveloping economy such as India. Regarding consumption wealth effect of housing,Gramlich (2002) argued that when house prices increase relative to the prices of othergoods and services, those who intend to live in their houses forever would have higherwealth, but they would have no additional resources for increasing their consumptionof real housing services or other goods and services. Given data limitations, only thewealth effect associated with stock market wealth could be empirically analysed inthe Indian context. In India, household financial assets and their investment in stockmarkets seem to have undergone two key shifts. The first phase witnessed significantrise in household financial wealth during early 1990s, attaining a peak in 1991–1992,as the economic reforms and liberalisation started and stock markets were opened toforeign investors. The second phase of expansion set in towards the mid-2000s with

4 In contrast to the stock wealth effect, the effect of changes in real property prices on consumption wasfound to be much stronger in the European countries. Rising real property prices may influence consumptionnot only through higher realised home values but also by the households’ ability to refinance a mortgage.5 The empirical work in the case of advanced economies also suggest that impact of changes in stockprices on consumption is bigger in economies with market-based financial systems than in economies withbank-based financial systems. Further, this impact from stock markets to consumption has increased overtime for both sets of countries.

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Growth rate of real private final consump�on expenditure

Stock market capitaliza�on to GDP ra�o (right scale)

Fig. 2 Stock market wealth and domestic consumption demand in India (In %)

the domestic economy shifting to another high growth path and continued until therecent global financial crisis. In tandem, households’ holding of stocks also increased,accounting for about 13% of household financial assets in 2007–2008 (Fig. 1). Theexpansion in household stock wealth has coincided with the stock price cycles.

This issue of stock market wealth effect in India assumed importance in the contextof global financial crisis when the stock market wealth eroded significantly. Marketcapitalisation, which increased steadily from about 5% of GDP in the early 1980sto 113% of GDP in 2007–2008, declined subsequently to 59% in 2008–2009 whenthe global financial crisis hit the domestic asset markets. Such an extent of erosionof stock wealth raised concerns about its impact on the consumption demand, not-withstanding the fact that household had only about 13% of their assets in the formof stocks (Fig. 2).6 The concern regarding the impact of an adverse shock to stock

6 Households have, however, indirect exposure to stock market through many other conduits such as invest-ment in equity-based mutual funds, unit linked insurance investment plans and other personal insuranceFootnote 6 continued

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wealth on consumption demand also arises from the fact that private final consump-tion demand constituted an average of about 65% of the aggregate demand in India.Thus, growth in private consumption demand decelerated from 9.8% in 2007–2008 to6.8% in 2008–2009 and further to 4.3% in 2009–2010. It may be emphasised that theimpact of the global financial crisis on India was felt with some lag and the greaterimpact on consumption demand was perceived to be emanating from a loss in expectedhousehold wealth in stocks.

3 The model

We examine the role of wealth shocks in affecting consumption demand in a Bayesianstructural vector auto regression (SVAR) framework. The model has been estimatedusing the following variables: (i) real labour income, (ii) real household consumptiondemand, (iii) price level, (iv) real interest rate, and (v) real stock wealth. The standardstructural system can be considered of the following linear and stochastic dynamicform:

A0 yt = B (L) yt−i + εt; i = 1, . . . . . . . . . n (1)

In the model yt = (y, c, p, r, w) where y = real labour income, c = real consumption,p = price level, r = real interest rate, w = real stock wealth. Corresponding to theSVAR model (1), the reduced form representation can be obtained by premultiplying(1) with the inverse of A0.

A−10 A0 yt = A−1

0 B (L) yt−i + A−10 εt (2)

yt = A (L) yt−i + et et ∼ N (0, I ) (3)

We impose the following theoretically plausible restrictions on the structure of themodel to identify the structural shocks.

⎡⎢⎢⎢⎢⎣

ey

ec

ep

er

ew

⎤⎥⎥⎥⎥⎦

=

⎡⎢⎢⎢⎢⎣

1 0 0 0 0α21 1 0 0 0α31 α32 1 0 0α41 α42 α43 1 0α51 α52 α53 α54 1

⎤⎥⎥⎥⎥⎦

=

⎡⎢⎢⎢⎢⎣

εy

εc

εp

εr

εw

⎤⎥⎥⎥⎥⎦

The first equation in the above matrix indicates that real income is not contem-poraneously affected by consumption demand, interest rate, prices and stock marketwealth. It is sometimes understood that real incomes could be contemporaneouslyaffected by stock wealth. We, however, argue that real income could be affected bystock wealth only with a lag as equity prices are, generally, relatively volatile than

and pension plans. Household investments under such schemes seem to have increased significantly in therecent years.

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housing prices (see Mishkin 2007). This causes uncertainties in the household deci-sions about consumption as they are not able to decide whether the shift in the level ofwealth is transitory or durable. Thus, through demand effect, stock wealth may causevariations in real activity only with some lag. Consumption, however, is affected bythe real income shocks in the same period. This assumption seems to be more plausiblefor a developing economy like India where propensity to consume out of income isgenerally high as a large share of population falls in the lower income bracket withhigh propensity to consume.

The interest rate equation has the underlying representation of a reaction function,with monetary policy responding contemporaneously to real income, consumptiondemand and price shocks. In India, monetary policy has historically operated throughboth the short term interest rates and cash reserve ratio (CRR), with quantity variablesdominating the transmission channel of monetary policy. During the 1990s, the mon-etary policy underwent a paradigm shift with the increasing openness of the Indianeconomy and deregulation and liberalisation of financial markets that emerged asimportant conduits for monetary policy transmission. The reforms during the 1990senhanced the sensitivity of price signals from the central bank, making interest ratean increasingly dominant transmission channel. Accordingly, the central bank hasfocussed on the interest rate channel of monetary policy in influencing aggregatedemand and the quantity channel has gone down in its importance. Although CRRis still used as one of the policy instruments, given its effect on liquidity, the ulti-mate impact is felt on the short-term money market rates that the central bank aims toinfluence. The impact of such quantitative measures, thus, is often reflected in short-term interest rate instantaneously or with small lags. A simple Granger causality testreaffirms that a change in bankers’ deposits with the central bank causes change inshort-term interest rates. It is, therefore, plausible to use short-term interest rate toreflect monetary policy reaction and also a variable indicating the substitution effecton household consumption.

Given the very nature of asset prices, stock market wealth is considered to be con-temporaneously affected in the model by real income, consumption demand, supplyshocks and interest rate shocks (monetary policy shocks). In the identification schemewe assume that interest rates do not contemporaneously respond to equity wealth,where as equity wealth responds to interest rates. Empirical investigations do not seemto offer any reliable relationship between changes in interest rates and equity prices.Mishkin and White (2002) have argued that most fluctuations in stock prices occurfor reasons unrelated to monetary policy, either reflecting real fundamentals or animalspirits. The loose link between monetary policy and stock prices, therefore, impliesthat the ability of central banks to control stock prices is limited. They further argue, ‘ifthe central bank indicates that it wants stock prices to change in a particular direction,it is likely to find that stock prices may move in the opposite direction’. We empiricallytested the causal relationship between the short-term interest rate and stock prices inIndia. The Granger causality tests on monthly data for the period 1996:2 to 2010:3reveal that there is no causal relationship from changes in equity prices [d(stock)] toshort-term interest rate (TBY91) in India, implying that the monetary policy does notreact to stock prices, though stock prices respond to changes in monetary policy stance(Table 1).

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Table 1 Causality analysis between stock prices and short-term interest rate (%)

Null hypothesis F-statistic Prob.

d(stock) does not Granger cause TBY91 0.05 0.955

TBY91 does not Granger cause d(stock) 5.24 0.008

We estimate a Bayesian VAR model with five variables for the period 1996:Q2to 2010:Q1 to examine the impact of changes in stock wealth effect on consumptiondemand: y = real labour income measured in terms of real GDP at factor cost, c =real consumption demand represented by real private final consumption expenditure,p = the wholesale price index, which is taken as a measure of price level as this is themost representative price in India, rr = real short-term interest i.e., 91-day Treasurybill yield minus GDP deflator inflation, w = real stock wealth measured in terms ofstock market capitalisation deflated by the GDP deflator. We have used real labourincome, price deflator (as a proxy for uncertainty and real depreciation of non-indexedfinancial assets) and interest rate (a proxy for substitution effect on consumption andmonetary policy stance) in order to adequately control for the effect of other factorsinfluencing consumption. Although a proper estimation of consumption wealth effectwould benefit from cointegration analysis with additional variable on housing wealth;this type of long run analysis, however, could not be undertaken for India due to thefollowing data constraints. First, the stock markets in India became active in the early1990s after the liberalisation of the financial sector and opening up of the economy.The household participation turned significant only during the 1990s. Second, under-standing the impact of housing wealth on consumption in developing economies isconstrained by the lack of data on housing wealth. India, like many other developingeconomies, lacks data on both housing stock and housing prices, and thus the housingasset value, due to lack of institutional set up to collect such information. The NationalHousing Bank has started compiling data on the housing price index recently but thedata are available only since 2008 and that too at half yearly frequency with significanttime lag. Thus, it is not possible to capture the impact of housing wealth explicitly inan econometric model. Third, quarterly income and household consumption data arenot available prior to 1996. Therefore, given the lack of long time series quarterly datafor India, it would be appropriate to estimate a structural VAR model with priors in aBayesian framework.

The empirical literature also focuses on the differences in wealth effect across agegroups (Lehnert 2004; Grant and Peltonen 2005). Such studies indicate significantwealth effect variation across income classes arising in case of stock wealth ratherthan housing wealth. Maki and Palumbo (2001) argue that higher consumption amongthe richest households in the US in the latter half of the 1990s largely explained therise in consumer spending. It is also observed that the reason for stock market wealtheffect being lower than housing wealth effect could be attributed to the fact that equityholdings are more concentrated among rich households than housing wealth whichis more evenly distributed. As equity ownership becomes widespread, the effect onaggregate consumption of a unit change in equity wealth may increase. We would,

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How important is the stock market wealth effect on consumption in India? 923

however, like to add that the data on wealth distribution in advanced economies areusually obtained from household wealth surveys and absence of such surveys in India,like most developing economies, does not allow us to bring in these micro dimensionsto the analysis.

The commonly applied model selection criteria regarding the selection of lag lengthhave been used. As most information criteria suggest a lag length of two quarters, weallow for two lags in the model. In order to examine the robustness of the model,we carry out the test of residual serial correlation. The LM test statistics suggestedthat the residuals are free from serial autocorrelation up to 6 lags. The VAR residualnormality test also suggested that the null hypothesis of multivariate normal residualsis not rejected for the test of skewness at 5% level.

4 Empirical results

The impulse responses from the estimated Bayesian structural VAR model suggestthat a positive real income shock causes an instantaneous and persistent increasein real consumption demand over medium to long-term (Fig. 3). The magnitude ofshock reveals that a 10% increase in real income on an average causes 5% increasein real consumption demand and, thus emerges as a key variable driving consumptiondemand in India. The stock wealth shock, signifying stock market wealth effect, hasshort run and marginal effect on consumption demand. The estimates suggest that a10% positive shock (increase) to stock wealth raises consumption demand by 0.3%.7

There does not seem to be a significant long run impact of stock market wealth effecton consumption demand. This appears theoretically plausible as stock wealth gainsare considered to be relatively short run in nature by the households as compared toother forms of wealth such as housing/mortgages.8

The monetary policy shocks, which are considered to be important for aggregatedemand management, are important in stabilising consumption demand in the shortrun, with negligible long run effects. Empirical literature on the impact of interest rateon consumption has generally found small effects of interest rates on consumption(see Hall 1988).9 In the Indian context, the lack of significant response of householdconsumption to real interest rate shocks could be attributed to the higher propensityto consume dominated by essential consumption goods with relatively low price elas-ticity and low penetration of debt-financed consumption unlike advanced economies.Positive supply shocks augment consumption with a lag over medium to long-term,

7 The results are similar to the finding of Funke (2004) for the EMEs as a whole.8 The stock market wealth effect, being short run in nature, does not have large, long run effect on con-sumption demand since consumers do not perceive changes in stock wealth to cause permanent increase intheir wealth. Secondly, housing wealth effect is considered to be durable in nature and may have enduringimpact on consumption demand. However, presently, there is a lack of time series data on housing pricesor housing wealth in India.9 An increase in interest rates will reduce total disposable income when households are in a net debt positionand thus contribute to reducing consumption, which is also called the income effect. An increase in interestrates may also work through the substitution effect by way of making debt-financed consumption costlierwith an associated increase in savings ratio.

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Real income shock Stock market wealth shock

0 5 10 15-0.0050

0.0000

0.0050

0.0100

0.0150

0 5 10 15-0.0050

0.0000

0.0050

0.0100

0.0150

Monetary policy shock Supply shock

0 5 10 15-0.0050

0.0000

0.0050

0.0100

0.0150

0 5 10 15-0.0050

0.0000

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Consumption demand shock

0 5 10 15

-0.0050

0.0000

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0.0100

0.0150

Fig. 3 Response of consumption demand to various shocks in India

which are perhaps important for a supply constrained developing economy like India.The residual shock in the model, capturing the combined effect of housing wealth andother financial and non-financial wealth not included in the model besides the impactof uncertainties in economic environment, has strong short run effect on consumption,which dies down over medium to long run. Some persistence of consumption demandshocks over the medium-term could be due to the presence of unaccounted housingwealth effect that has more durable impact on household consumption. Details of allimpulse responses generated from the model are presented in Fig. 4.

The variance decomposition analysis presented in Table 2 explains the contributionof various structural shocks to overall fluctuation in consumption demand. It is evidentthat while consumption demand shocks explain large fluctuation in real consumptionin the short run, it is the real income shocks that increasingly explain the movement of

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Response of output Response of prices Response of interest rates Response of stock wealthA

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Fig. 4 Impulse responses of macroeconomic aggregates to various shocks

real consumption over medium to long run horizon. Interest rate shocks explain onlylimited fluctuation in real consumption, which could be partly explained by the lowdegree of debt-financed household consumption in India. The stock market wealthshocks increasingly explain fluctuations in consumption demand up to 10 quarters,thereafter, the incremental effect is small. This also validates the presumption of asmall and short run stock wealth effect in India.

Even though Indian stock prices corrected sharply in response to the global finan-cial crisis, the negative wealth effect, particularly from the viewpoint of a contractionin consumption demand, has been relatively low. In Indian stock market a possibleabsence of large leveraged positions (unlike in advanced economies) or perhaps alow degree of leverage could be one of the main factors that yield relatively effect onconsumption demand. This could be partly attributed to the prudential regulation ofthe financial system wherein bank lending to sectors such as stock markets and realestate are regulated in relation to their asset portfolio and attract higher risk weights.Nevertheless, in respect of real estate wealth particularly, the role of leverage could be

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Table 2 Variance decomposition of consumption demand explained by various shocks (%)

Quarter Income shock Consumptiondemand shock

Supply shock Monetarypolicy shock

Stock wealthshock

1 9.3 90.7 0.0 0.0 0.0

4 24.3 66.8 0.6 4.9 3.4

8 38.7 42.6 5.4 3.8 9.6

12 46.8 30.0 8.2 4.3 10.7

16 50.9 22.7 10.9 4.8 10.7

20 53.6 18.3 12.6 4.9 10.6

higher due to agents’ expectations of a durable rise in the value of assets, and hencethe wealth effect might be stronger. When leverage is used to build assets, correctionin asset prices could entail excessive negative wealth effect, but the contractual lia-bilities have to be serviced at the contracted rate. An analysis of asset prices basedsolely on stock price movements entails the risk of a possible conjecture that wealthshocks are not significant in terms of macroeconomic effects on aggregate demandand inflation, which in turn could lead to the fallacious judgement that monetary orregulatory policies need not respond to asset price build-up.

5 Conclusion

Estimates from a Bayesian VAR model reveal that a positive real income shock causesa persistent increase in real consumption demand that increases over time. A 10%increase in real income leads to 5% increase in real consumption. The real incomeshocks are also persistent in nature. This is consistent with the higher propensity ofhouseholds to consume out of income in a developing economy such as India. The stockmarket wealth shock has only a short run and small effect on consumption demand.The estimates suggest that a 10% increase in stock prices raises consumption demandby 0.3%. This seems to be theoretically plausible as unlike the housing wealth effect,in case of stock market wealth consumers do not perceive changes in wealth to causepermanent shift in their expected incomes, given the inherent volatility of stock pricesand uncertainties about the asset price cycles. Both supply shocks and monetary policyshocks also explain only a limited variation in real consumption demand in the shortrun. The limited impact of real interest rate shocks in affecting consumption couldbe attributed to the relatively low level of debt-financed consumption in India unlikeadvanced economies. Thus, it is the real income shock that explains the maximumfluctuation in real consumption over a medium to long run horizon.

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