In these two further pictures [Figures 1b and 2b], the quantity of aggregate risk is proxied by the macroeconomic uncertainty introduced by the volatility of real per-capita consumption growth [– as measured by rolling standard deviations of per-capita real consumption growth –] and the level of inflation in the two economies.
4 Unfortunately, the price that markets attach to that quantity – agents’ risk aversion – is not directly observable or easily approximated by observable variables. I shall come back to this point later. Why concentrate on consumption volatility as a proxy of real macroeconomic uncertainty?