Industry bubbles and the cross-sectional variation of expected consumption growth

Abstract

We study the relationship between the domestic consumption growth and industry bubbles, under the assumption that, at a global level, the bubbles created by productive countries totally or partially offset the bubbles created by unproductive countries. Using a methodology based on a time-varying parameter vector autoregression, we define the expected consumption growth as a function of the exposure to bubbly episodes and the price of bubbles, among other variables. We test the model for nine European countries. Our results show that the variation of construction and technology bubbles has a strong explanatory power for the domestic consumption growth.