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Unemployment and Consumption in Chile

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  • Claudio Soto

Abstract

This article presents an empirical study of the effect of unemployment on aggregate consumption of non-durable goods in Chile (1990-2002). Using an error-correction model, the results show that unemployment lags have a negative and statistically significant sort-run impact on consumption growth. Three hypotheses that relate unemployment and consumption are also analyzed. First, it is shown that unemployment is not a good predictor of future disposable income. Therefore, it does not signal changes in permanent income. Moreover, the results do not support the implications of the certainty-equivalence version of the permanent income hypothesis. Second, there is evidence that unemployment affects income volatility. Hence, the relationship between unemployment and consumption could be explained by the precautionary savings motive. However, for this mechanism to be consistent with the fact that unemployment has a negative impact on consumption growth, the effect of uncertainty on consumption must be persistent. Finally, there is also evidence that unemployment could affect consumption through its effect on income distribution. However, the latter result is not robust.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 258.

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Date of creation: May 2004
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Handle: RePEc:chb:bcchwp:258

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  16. Rodrigo Vergara, 2001. "Determinantes del ahorro privado," Central Banking, Analysis, and Economic Policies Book Series, in: Felipe Morandé & Rodrigo Vergara & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.), Análisis Empírico del Ahorro en Chile, edition 1, volume 1, chapter 4, pages 83-104 Central Bank of Chile.
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Cited by:
  1. P R Agénor, 2004. "The Macroeconomics of Poverty Reduction," Centre for Growth and Business Cycle Research Discussion Paper Series 43, Economics, The Univeristy of Manchester.

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