Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets
56 Pages Posted: 1 Nov 2008
Date Written: September 16, 2008
Abstract
Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non-state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.
Keywords: Consumption Euler equation, survey data, international capital mobility
JEL Classification: E21, F32, F41
Suggested Citation: Suggested Citation
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