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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 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.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 949.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:949

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Keywords: Capital market ; Econometric models ; International finance;

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References

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  1. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," Discussion Papers 07-016, Stanford Institute for Economic Policy Research.
  2. 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, vol. 53(4), pages 671-698, May.
  3. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  4. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
  5. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
  6. Andrea Ferrero, 2007. "The long-run determinants of U.S. external imbalances," Staff Reports 295, Federal Reserve Bank of New York.
  7. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2003. "International risk-sharing and the transmission of productivity shocks," Working Papers 03-19, Federal Reserve Bank of Philadelphia.
  8. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-93, March.
  9. Allen C. Head & Todd D. Mattina & Gregor W. Smith, 2004. "Real Exchange Rates, Preferences, and Incomplete Markets: Evidence, 1961-2001," Working Papers 1246, Queen's University, Department of Economics.
  10. Paul Bergin & Steven Sheffrin, . "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Department of Economics 97-22, California Davis - Department of Economics.
  11. Takashi Kano, 2003. "A Structural VAR Approach to the Intertemporal Model of the Current Account," Working Papers 03-42, Bank of Canada.
  12. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.).
  13. Croushore Dean, 2010. "An Evaluation of Inflation Forecasts from Surveys Using Real-Time Data," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, May.
  14. 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, vol. 9(2), pages 220-233, June.
  15. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
  16. Eric Ghysels & Jonathan H. Wright, 2006. "Forecasting professional forecasters," Finance and Economics Discussion Series 2006-10, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Epstein, Brendan & Mukherjee, Rahul & Ramnath, Shanthi, 2014. "Taxes and International Risk Sharing," International Finance Discussion Papers 1110, Board of Governors of the Federal Reserve System (U.S.).
  2. Hoffmann, Mathias & Krause, Michael & Laubach, Thomas, 2011. "Long-run growth expectations and 'global imbalances'," Discussion Paper Series 1: Economic Studies 2011,01, Deutsche Bundesbank, Research Centre.
  3. Michael B Devereux & Gregor W Smith & James Yetman, 2009. "Consumption and real exchange rates in professional forecasts," BIS Working Papers 295, Bank for International Settlements.
  4. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2013. "Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach," Working Papers 1303, Department of Applied Economics II, Universidad de Valencia.
  5. Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2012. "Disagreement Among Forecasters in G7 Countries," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1081-1096, November.

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