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Testing the Optimality of Consumption Decisions of the Representative Household: Evidence from Brazil

Marcos Gesteira Costa and Carlos Enrique Carrasco-Gutierrez
Authors registered in the RePEc Author Service: Carlos Enrique Carrasco Gutierrez ()

Revista Brasileira de Economia - RBE, 2015, vol. 69, issue 3

Abstract: This paper investigates whether there is a fraction of consumers that do not behave as fully forward-looking optimal consumers in the Brazilian economy. The generalized method of moments technique was applied to nonlinear Euler equations of the consumption-based capital assets model contemplating utility functions with time separability and non-separability. The results show that when the household utility function was modeled as constant relative risk aversion, external habits and Kreps-Porteus, estimates of the fraction of rule-of-thumb households was, respectively, 89%, 78% and 22%. According to this, a portion of disposable income goes to households who consume their current incomes in violation of the permanent income hypothesis.

Date: 2015
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