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Abstract for:

Why is Consumption so Seasonal?

Andrew Scott,  October 1995
Paper No' CEPDP0269:


UK and US data suggest that consumption seasonality is both stochastic and characterised by permanent changes, that is there are seasonal unit roots in consumption. This paper explains the changes in the seasonal pattern of UK consumption and in doing so offers new insights into the much studied business cycle characteristics of consumption. We find that changes in consumption seasonality have zero or negative correlation with changes in the income seasonal, an observation which casts doubt on liquidity constraints as an important determinant of consumption fluctuations. Neither is consumption seasonality driven by precautionary saving, rates of return or climatic variables. Instead, seasonality in consumption is induced by the utility function, with the evidence ruling out seasonal habits or periodic effects. The evidence is consistent with seasonality changing due to preference shocks which we interpret, based on econometric evidence and a historical survey, as changes in customs. While these changes are slow moving they generate substantial variation in seasonal fluctuations in the post-war period, with Christmas consumption gaining in importance. Our results suggest that seasonal fluctuations may differ significantly from business cycle fluctuations and suggest that preference shifts should be considered as a possible source of non-seasonal fluctuations in consumption.