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Econometric modeling of consumers' expenditure in Venezuela

  • Julia Campos
  • Neil R. Ericsson

Starting from a theoretical model with optimizing economic agents, we develop a highly parsimonious econometric model of consumers' expenditure on non-durables and services in Venezuela for 1970-85. Disposable income, liquidity, and inflation determine expenditure in an economically sensible fashion. The empirical model is robust and has constant, well-determined parameter estimates. In specifying it, econometric methodology plays a fundamental role, and we address issues of empirical model design and evaluation, cointegration, exogeneity, policy analysis, and encompassing. Using the last concept, a large class of expectations and VAR models is found to be incompatible with the data. In particular, Hall's (1978) hypothesis (derived from the life cycle-permanent income hypothesis) that expenditure is a random walk and only predictable from its own past is firmly rejected. The empirical model provides a clear interpretation for why that is so.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 325.

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Date of creation: 1988
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Handle: RePEc:fip:fedgif:325
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