Us macroeconomic trends, secular stagnation and the implications for consumer welfare
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The secular decline in real interest rates in developed nations over the last half century has led to a revival of interest in the secular stagnation hypothesis. This paper looks at the effect of these developments on welfare through the lens of the Epstein-Zin (1991) recursive utility model. They show that in their model, welfare is a Cobb-Douglas function of current consumption and wealth. We use this to develop a welfare index given household wealth and consumption aggregates and an estimate of the elasticity of intertemporal substitution.
We use a novel econometric model to estimate this parameter from the Epstein-Zin stochastic discount factor. Before the financial crisis, US household consumption and wealth grew at similar rates, increasing welfare similarly. However, since then, household wealth has grown much faster than consumption and has been more volatile. The implication is that falling rates of return and rising asset prices have increased current at the expense of future consumption. Our estimates suggest that there has been little or no increase in the welfare of the average American since the turn of the millennium.