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Consumption dynamics and the expectation channel in a Small Open Economy

Author

Listed:
  • César Carrera

    (Banco Central de Reserva del Perú and Universidad del Pacífico)

  • Miguel Puch

    (Banco Central de Reserva del Perú)

Abstract

The transmission mechanism between consumption and its fundamentals has been under reviews in the literature from Friedman’s permanent income hypothesis to household’s liquidity constraints. One particular angle to explain consumption is focused on the role of consumer expectations as a determinant of consumption spending. Here we explore alternative measures for consumer expectations (captured by surveys to households) by taking into account general manager expectations and by using imports of durable consumption goods (which capture consumer confidence about future economic conditions). We argue that, for a small open economy, the expectations channel is well captured by alternative measures; find that even though there is a pass-through from expectations to consumption, this effect tends to have a short-period effect; and also report those values and periods of time for which the alternative measures have a significant impact on consumption.

Suggested Citation

  • César Carrera & Miguel Puch, 2019. "Consumption dynamics and the expectation channel in a Small Open Economy," Working Papers 144, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:144
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Durable goods; Business expectations; Households expectations;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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