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Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

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  • Charles Engel
  • John H Rogers

Abstract

Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradict the simplest of open-economy models in which there is a freely traded non-state-contingent bond and purchasing power parity holds. This paper explores 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. IMF Staff Papers (2009) 56, 543–573. doi:10.1057/imfsp.2008.33; published online 27 January 2009

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 56 (2009)
Issue (Month): 3 (August)
Pages: 543-573

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Handle: RePEc:pal:imfstp:v:56:y:2009:i:3:p:543-573

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  10. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1163-1212, May.
  11. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Testing an optimizing model of the current account via the consumption function," Journal of International Money and Finance, Elsevier, Elsevier, vol. 9(2), pages 220-233, June.
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  13. Takashi Kano, 2003. "A Structural VAR Approach to the Intertemporal Model of the Current Account," Working Papers, Bank of Canada 03-42, Bank of Canada.
  14. Eric Ghysels & Jonathan H. Wright, 2006. "Forecasting professional forecasters," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-10, Board of Governors of the Federal Reserve System (U.S.).
  15. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
  16. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(4), pages 671-698, May.
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Cited by:
  1. Michael B. Devereux & Gregor W. Smith & James Yetman, 2009. "Consumption and Real Exchange Rates in Professional Forecasts," NBER Working Papers 14795, National Bureau of Economic Research, Inc.
  2. Epstein, Brendan & Mukherjee, Rahul & Ramnath, Shanthi, 2014. "Taxes and International Risk Sharing," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1110, Board of Governors of the Federal Reserve System (U.S.).
  3. Dovern, Jonas & Fritsche, Ulrich & Slacalek, Jiri, 2009. "Disagreement among forecasters in G7 countries," Working Paper Series, European Central Bank 1082, European Central Bank.
  4. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2013. "Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach," Working Papers, Department of Applied Economics II, Universidad de Valencia 1303, Department of Applied Economics II, Universidad de Valencia.
  5. Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2011. "Long-run growth expectations and "global imbalances"," CFS Working Paper Series, Center for Financial Studies (CFS) 2011/01, Center for Financial Studies (CFS).

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