Effects of Uncertainty Shocks on Household Consumption and Working Hours: A Fuzzy Cognitive Map-Based Approach

Abstract

This paper aims to model an individual’s decision-making process in relation to macroeconomic dynamics that involve a large number of variables, which might inflict dimensionality issue in empirical analysis. We employ the fuzzy cognitive map (FCM) for this purpose, and present a parsimonious approach in assessing the impacts of uncertainty shocks on individual households by constructing FCM where households adjust their consumption and working hours in response to changes in exogenous economic uncertainty. We employ FCM to analyze how uncertainty shocks affect the households’ consumption, working hours, and income sources. We further conduct simulations to examine roles of expansionary fiscal policy in alleviating the negative impacts of uncertainty shocks. Our simulations yield similar results as compared to the existing literature on the impacts of uncertainty shocks. We suggest a hybrid algorithm of constructing FCM, and hence demonstrate the extensibility of FCM in analyzing complex macroeconomic systems.

Keywords

• consumption
• fuzzy cognitive map
• nonlinear Hebbian learning
• uncertainty shock
• working hours