The Dynamics of the Brazilian Current Account with Rule of Thumb Consumers

Holanda Oliveira, Lucio Hellery and Carrasco Gutierrez, Carlos Enrique (2015): The Dynamics of the Brazilian Current Account with Rule of Thumb Consumers.

Abstract

The traditional current account intertemporal model assumes that all individuals follow the permanent income theory. The innovation proposed in this work is to incorporate the idea that some consumers have rule of thumb behavior with the classic current account dynamics model and also to include habit formation in the utility function. Two stage least squares and generalized method of moments econometric techniques are applied to estimate the parameters: the share of aggregate income that follows the rule of thumb behavior and the habit formation coefficient. Based on the current account data on the Brazilian economy, the results confirm some stylized facts presented in the literature as well as some testable basic propositions of the intertemporal current account model. The rule of thumb behavior is significant and ranges from 0.48 to 0.54, indicating that the rule of thumb hypothesis is important in the model. Moreover, the habit formation coefficient also has some significance in the estimated model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rule of Thumb; Consumption; Current Account; Intertemporal Model; Habit Formation.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

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