Understanding Consumption in Open Economies: Argentina 1920-2005

GAY, ALEJANDRO

La Serena, Chile

Congreso; Encuentro de la Sociedad de Economía de Chile; 2006

Sociedad de Economía de Chile, SECHI

In a country prone to currency crises and great changes in relative prices, the prevailing In a country prone to currency crises and great changes in relative prices, the prevailing paradigm cannot fully explain consumption behavior. To tackle this problem, a small open economy model with optimizing agents is used. In an open economy the fundamentals of private consumption appear to be: domestic product, net foreign assets income, relative tradable/nontradable productivity, and terms of trade. Considering these fundamentals and using multicointegration techniques, this paper analyzes Argentina?s long-run consumption behavior. The new fundamentals are empirically tested and support is found to the idea of disaggregating the real gross national income in its domestic (real GDP) and foreign related components. Results also show that consumption volatility may be explained by changes in national income structure due to external shocks and imbalances. The framework developed in the paper allows to explain why in some countries (e.g. Argentina), consumption is more volatile than output (GDP). JEL Classification Numbers: E21, F41, D11, C32