Author(s)

Ricardo Ramalhete Moreira

Department of Economics, Federal University of Espírito Santo, Vitória, Brazil.

This article proposed and tested the hypothesis that both expected and unanticipated responses of cyclical consumption to changes in real interest rate (and income) are marked by non-linearities and asymmetries, depending on the regime concerning the underlying real consumption time trend. The reference model is in line with the micro-founded optimizing behavior of consumers, and different inference methods were employed to test our hypothesis for the case of a large emerging economy, like the Brazilian one, over the monthly period from February 2003 to July 21, thereby covering a post COVID-19 sample. Under different model specifications and alternative methods for extracting latent cycles, the evidence indicated that in a regime of stagnation/decline in real consumption, the latter becomes more sensitive to both real interest rate deviations and output gaps, compared to what is observed under a growth regime.

Cyclical Consumption, Consumption Trend, Real Interest Rate, Output Gap, Risk Aversion, Brazil

Moreira, R. (2024) Cyclical Consumption, Real Interest Rate Deviations and Output Gaps in a Large Emerging Economy: Expected and Unexpected Responses under Different Regimes. Modern Economy, 15, 493-514. doi: 10.4236/me.2024.155025.