TITLE:
Cyclical Consumption, Real Interest Rate Deviations and Output Gaps in a Large Emerging Economy: Expected and Unexpected Responses under Different Regimes
AUTHORS:
Ricardo Ramalhete Moreira
KEYWORDS:
Cyclical Consumption, Consumption Trend, Real Interest Rate, Output Gap, Risk Aversion, Brazil
JOURNAL NAME:
Modern Economy,
Vol.15 No.5,
May
11,
2024
ABSTRACT: 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.