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The Dynamics of the Brazilian Current Account with Rule of Thumb Consumers

Lucio Hellery Holanda Oliveira and Carlos Enrique Carrasco Gutierrez ()

MPRA Paper from University Library of Munich, Germany

Abstract: The traditional current account intertemporal model assumes that all individuals follow the permanent income theory. The innovation proposed in this work is to incorporate the idea that some consumers have rule of thumb behavior with the classic current account dynamics model and also to include habit formation in the utility function. Two stage least squares and generalized method of moments econometric techniques are applied to estimate the parameters: the share of aggregate income that follows the rule of thumb behavior and the habit formation coefficient. Based on the current account data on the Brazilian economy, the results confirm some stylized facts presented in the literature as well as some testable basic propositions of the intertemporal current account model. The rule of thumb behavior is significant and ranges from 0.48 to 0.54, indicating that the rule of thumb hypothesis is important in the model. Moreover, the habit formation coefficient also has some significance in the estimated model.

Keywords: Rule of Thumb; Consumption; Current Account; Intertemporal Model; Habit Formation. (search for similar items in EconPapers)
JEL-codes: C22 E21 F32 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-acc, nep-cse, nep-mac and nep-upt
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