Consumption, liquidity constraint and welfare in Brazil

Consumption, liquidity constraint and welfare in Brazil

Blog Article

This paper investigates empirically what are the welfare gains of cycle smoothing in Brazil.We follow Lucas (1987) decomposing logarithmic aggregate consumption in a trend and a cycle, and then calculating what are the welfare gains of eliminating cyclical variability.Differently from Lucas, the trend component here is not deterministic, allowing for a stochastic part that has a unit root.Trend and cycle are Covers extracted using an unobserved components model, which can be written in space-state form.In estimating the cycle in consumption we have used information contained in income, consumption and saving, following much of the current literature of aggregate consumption: consumption and income cointegrate with long-run proportionality (a common trend), with the saving ratio being stationary.

They also have common serial correlation (a common cycle) that can be explained in terms of liquidity constraints.The results show that the welfare gains of cycle smoothing in Brazil are small, which is consistent with previous studies performing trend-cycle Face Cream decomposition of Brazilian macroeconomic series.Finally, the results for Brazil are compared to those of the U.S.economy.