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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.

Suggested Citation

  • Claudio Soto, 2004. "Unemployment and Consumption in Chile," Working Papers Central Bank of Chile 258, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:258
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    References listed on IDEAS

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    3. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 2003. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 586-604, August.
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    5. Lusardi, Annamaria, 1997. "Precautionary saving and subjective earnings variance," Economics Letters, Elsevier, vol. 57(3), pages 319-326, December.
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    7. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
    8. Acemoglu, Daron & Scott, Andrew, 1994. "Consumer Confidence and Rational Expectations: Are Agents' Beliefs Consistent with the Theory?," Economic Journal, Royal Economic Society, vol. 104(422), pages 1-19, January.
    9. Klaus Schmidt-Hebbel & Luis Serven, 2000. "Policy Shifts and External Shocks in Chile Under Rational Expectations," Econometric Society World Congress 2000 Contributed Papers 1098, Econometric Society.
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    11. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-692, December.
    12. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
    13. Lusardi, Annamaria, 1998. "On the Importance of the Precautionary Saving Motive," American Economic Review, American Economic Association, vol. 88(2), pages 449-453, May.
    14. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
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    Cited by:

    1. Pierre-Richard Agenor, 2005. "The Macroeconomics Of Poverty Reduction," Manchester School, University of Manchester, vol. 73(4), pages 369-434, July.

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