IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/949.html
   My bibliography  Save this paper

Expected consumption growth from cross-country surveys: implications for assessing international capital markets

Author

Listed:
  • 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.

Suggested Citation

  • Charles Engel & John H. Rogers, 2008. "Expected consumption growth from cross-country surveys: implications for assessing international capital markets," International Finance Discussion Papers 949, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:949
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/ifdp/2008/949/default.htm
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/ifdp/2008/949/ifdp949.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul R. Bergin & Steven M. Sheffrin, 2017. "Interest Rates, Exchange Rates and Present Value Models of the Current Account," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 10, pages 287-316, World Scientific Publishing Co. Pte. Ltd..
    2. 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.
    3. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
    4. 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 358-393, March.
    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. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
    7. Kano, Takashi, 2008. "A structural VAR approach to the intertemporal model of the current account," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 757-779, September.
    8. Allen C. Head & Todd D. Mattina & Gregor W. Smith, 2004. "Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 782-801, August.
    9. Nason, James M. & Rogers, John H., 2006. "The present-value model of the current account has been rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol. 68(1), pages 159-187, January.
    10. 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.
    11. Ghysels, Eric & Wright, Jonathan H., 2009. "Forecasting Professional Forecasters," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 504-516.
    12. Nir Jaimovich & Sergio Rebelo, 2008. "News and Business Cycles in Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1699-1711, December.
    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. 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.
    15. Andrea Ferrero, 2007. "The long-run determinants of U.S. external imbalances," Staff Reports 295, Federal Reserve Bank of New York.
    16. 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 107-128, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Camarero, Mariam & Carrion-i-Silvestre, Josep Lluís & Tamarit, Cecilio, 2013. "Global imbalances and the intertemporal external budget constraint: A multicointegration approach," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5357-5372.
    3. Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2011. "Long-run growth expectations and "global imbalances"," CFS Working Paper Series 2011/01, Center for Financial Studies (CFS).
    4. Mathias Hoffmann & Michael U Krause & Thomas Laubach, 2019. "The Expectations-driven US Current Account," The Economic Journal, Royal Economic Society, vol. 129(618), pages 897-924.
    5. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
    6. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2021. "Análisis de la sostenibilidad del sector exterior en la OCDE con técnicas de multicointegración," Working Papers 2112, Department of Applied Economics II, Universidad de Valencia.
    7. Epstein, Brendan & Mukherjee, Rahul & Ramnath, Shanthi, 2016. "Taxes and international risk sharing," Journal of International Economics, Elsevier, vol. 102(C), pages 310-326.
    8. Likai Chen & Ekaterina Smetanina & Wei Biao Wu, 2022. "Estimation of nonstationary nonparametric regression model with multiplicative structure [Income and wealth distribution in macroeconomics: A continuous-time approach]," The Econometrics Journal, Royal Economic Society, vol. 25(1), pages 176-214.
    9. Kollmann, Robert, 2009. "Domestic Financial Frictions: Implications for International Risk Sharing, Real Exchange Rate Volatility and International Business Cycles," MPRA Paper 70348, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bussière, Matthieu & Karadimitropoulou, Aikaterini E. & León-Ledesma, Miguel A., 2021. "Current Account Dynamics And The Real Exchange Rate: Disentangling The Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 25(1), pages 28-58, January.
    2. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
    3. Braeu, Rebecca, 2010. "Consumption tilting and the current account: Evidence from Canada," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 304-312, April.
    4. Aikaterini Karadimitropoulou & Miguel A. León-Ledesma, 2009. "Sources of Current Account Fluctuations in Industrialized Countries," Studies in Economics 0910, School of Economics, University of Kent.
    5. Yu-Hsi Chou & Chun-Yen Tsai, 2021. "Sources of current account fluctuations in Taiwan: 1989–2015," Empirical Economics, Springer, vol. 60(4), pages 2125-2151, April.
    6. Hoffmann, Mathias, 2013. "What drives China's current account?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 856-883.
    7. Oleg Itskhoki, 2021. "The Story of the Real Exchange Rate," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 423-455, August.
    8. Oyakhilome IBHAGUI, 2017. "Understanding the sources of high current account fluctuations in 5 developed economies," Turkish Economic Review, KSP Journals, vol. 4(3), pages 250-274, September.
    9. Garg, Bhavesh & Prabheesh, K.P., 2017. "Drivers of India’s current account deficits, with implications for ameliorating them," Journal of Asian Economics, Elsevier, vol. 51(C), pages 23-32.
    10. Luo, Yulei & Nie, Jun & Young, Eric R., 2012. "Robustness, information–processing constraints, and the current account in small open economies," Journal of International Economics, Elsevier, vol. 88(1), pages 104-120.
    11. Shibata, Akihisa & Shintani, Mototsugu & Tsuruga, Takayuki, 2019. "Current account dynamics under information rigidity and imperfect capital mobility," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 153-176.
    12. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    13. Giancarlo Corsetti & Panagiotis T. Konstantinou, 2012. "What Drives US Foreign Borrowing? Evidence on the External Adjustment to Transitory and Permanent Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1062-1092, April.
    14. Takashi Kano, 2008. "Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect ( Revised version of CARF-F-101(2007); Revised version subsequently published in "Journal of International ," CARF F-Series CARF-F-124, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Mr. Tomasz Wieladek & Mr. Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 2012/098, International Monetary Fund.
    16. Takashi Kano, 2007. "Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect (Revised as CARF-F-124 (2008) )," CARF F-Series CARF-F-101, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    17. Tahir Mukhtar & Aliya H. Khan, 2011. "The Current Account Dynamics in Pakistan: An Intertemporal Optimisation Perspective," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 401-421.
    18. Kano, Takashi, 2009. "Habit formation and the present-value model of the current account: Yet another suspect," Journal of International Economics, Elsevier, vol. 78(1), pages 72-85, June.
    19. Mariam Camarero & Josep Lluís Carrion-i-Silvestre & Cecilio Tamarit, 2010. "External imbalances in a monetary union. Does the Lawson doctrine apply to Europe?," Working Papers 10-09, Asociación Española de Economía y Finanzas Internacionales.
    20. Dibooglu, Sel & Kapounek, Svatopluk, 2021. "The US current account, sustainability, and the international monetary system," Economic Systems, Elsevier, vol. 45(4).

    More about this item

    Keywords

    Capital market; Econometric models; International finance;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:949. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.