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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Expected consumption growth from cross-country surveys: implications for assessing international capital markets
Charles Engel
John H. Rogers
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.


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Charles Engel & John H. Rogers, Expected consumption growth from cross-country surveys: implications for assessing international capital markets, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 949, 2008.
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Keywords: Capital market ; Econometric models ; International finance
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