Essays on the Stochastic Behavior of Consumption and Output
Cavalcanti, Carlos B.
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Permalink
https://hdl.handle.net/2142/72416
Description
Title
Essays on the Stochastic Behavior of Consumption and Output
Author(s)
Cavalcanti, Carlos B.
Issue Date
1992
Doctoral Committee Chair(s)
Maloney, William F.,
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Economics, Theory
Abstract
This dissertation is comprised of three essays. The first essay, on the stochastic behavior of consumption, examines different formulations of the Euler equation, in order to estimate the intertemporal elasticity of substitution in Brazil during the 1980s. Our findings indicate that the intertemporal elasticity of substitution for those consumers who consume their permanent income is statistically significant but less than one, denoting that a rise in interest rates had both a substitution and income effects in Brazil during this period. The percentage of consumers that are liquidity constrained, i.e. constrained to consume their current level of income, is estimated to be around one third of the consumer population. The income effect and the relatively low percentage of current income consumers suggest that indexed assets has played an important role in allowing Brazilian consumers to spread income over time.
Recent research in consumption behavior has focussed on two issues. First, why do rational, forward looking consumers consume their current income? Second, if consumers consume their current income, what accounts for the relative smoothness of consumption viz-a-viz income? The second essay tries to address these questions in an optimizing framework where consumers consume according to their current income, but still allocate income intertemporally, by adjusting their stock of savings, to buffer against income fluctuations and therefore smooth consumption.
The third essay examines the stochastic behavior of output. Economists have traditionally relied on large exogenous shocks to explain output fluctuations. However, recent thinking on temporal agglomeration has suggested that factors such as nonconvexities in technology, trading externalities, output complementarities and spillover effects may account for some of the fluctuations in economic activity.
The essay presents two important pieces of evidence that support this view. First, temporal agglomeration, in the form of production bunching at the seasonal frequency, is a dominant source of output variability in Brazil. Second, the threshold autoregressive representation of log real GDP growth indicates that the degree of persistence of shock is strongly influenced by the state of the economy.
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