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Cross Country Evidence on Consumption Persistence

Belbute, José and Caleiro, António (2010): Cross Country Evidence on Consumption Persistence.

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Abstract

The detection and measurement of the level of persistence on aggregate and disaggregate private consumption in Italy, Norway and United Kingdom is the main focus of the paper. Using a non-parametric methodology applied to annual data it is concluded that that one cannot reject the presence of a significant process of persistence in aggregate and disaggregate consumption in the three countries, even though each one displaying different levels of persistence. In particular, durables (furnishing and housing & utilities) display a lower degree of persistence when compared with non-durables. These results are imperative from a policy point of view as they may affect the effectiveness of countercyclical fiscal and monetary policies that are currently being implemented to overcome the current economic crisis. Persistence in consumption does exist and cannot be ignored, whether the goal is to stabilize the level of output via consumption or to burst output via long-lasting increases in consumption. Being the case that cultural differences are not easily changed, a possible instrument is the interest rate. Our results do show that a decrease in the interest rates, in order to boost investment, may also lead to non desirables results from the viewpoint of consumption, in particular for the durables categories

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