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Consumption dynamics and the expectation channel in a Small Open Economy

Cesar Carrera () and Miguel Puch
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Miguel Puch: Banco Central de Reserva del Perú

No 144, Working Papers from Peruvian Economic Association

Abstract: The transmission mechanism between consumption and its fundamentals has been under reviews in the literature from Friedman’s permanent income hypothesis to household’s liquidity constraints. One particular angle to explain consumption is focused on the role of consumer expectations as a determinant of consumption spending. Here we explore alternative measures for consumer expectations (captured by surveys to households) by taking into account general manager expectations and by using imports of durable consumption goods (which capture consumer confidence about future economic conditions). We argue that, for a small open economy, the expectations channel is well captured by alternative measures; find that even though there is a pass-through from expectations to consumption, this effect tends to have a short-period effect; and also report those values and periods of time for which the alternative measures have a significant impact on consumption.

Keywords: Consumption; Durable goods; Business expectations; Households expectations (search for similar items in EconPapers)
JEL-codes: C16 F31 F41 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-opm
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