DP13687 The Extensive Margin of Aggregate Consumption Demand

Author(s): Claudio Michelacci, Luigi Paciello, Andrea Pozzi
Publication Date: April 2019
Date Revised: April 2019
Programme Areas: Industrial Organization, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13687

About half of the cyclical change in US non-durable consumption expenditure is due to changes in the products entering households' consumption basket (the extensive margin). Changes in the basket depend mostly on fluctuations in the rate at which households add new products; removals are relatively acyclical. These patterns are largely explained by the fact that households respond to income increases by adopting new product varieties in their consumption basket. Fluctuations in household adoption are a prominent determinant of the aggregate demand for new products and amplify the long-run welfare effects of aggregate shocks.