Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

56 Pages Posted: 1 Nov 2008

See all articles by Charles M. Engel

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: September 16, 2008

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.

Keywords: Consumption Euler equation, survey data, international capital mobility

JEL Classification: E21, F32, F41

Suggested Citation

Engel, Charles M. and Rogers, John H., Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets (September 16, 2008). FRB International Finance Discussion Paper No. 949. Available at SSRN: https://ssrn.com/abstract=1292439 or http://dx.doi.org/10.2139/ssrn.1292439

Charles M. Engel

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-3697 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-6197 (Phone)
206-685-7477 (Fax)

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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