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    14 views20 pages

    Dte 05

    Uploaded by

    JorgeYehezkel

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    © All Rights Reserved
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    angge lei ray onn2g Chow DOCUMENTO DE TRABAJO 5 Economia ( CONSUMPTION-SAVINGS, INTEREST RATES AND INFLATION IN LESS DEVELOPED COUNTRIES: AN ERROR CORRECTION MODEL ALEJANDRO VILLAGOMEZ mh Nota {Los editores han mantenido fielmente el taxto original del os dite presente docament Seen a 1 See Sa Gell cue of ete 7 Ye redacebin sn, (CENTRO DE INVESTIGACION ¥ DOCENCIA ECONOMICAS D.R 1002, Controde Invastigaciin y Docencia Reonémmeas, A.C. ‘Carretera México-Toluca kim 16.5, Lomas de Santa Fo, 01210 Méaico, DP. ‘Tpegrafa yculdade editrtal: Solar, Service Editoriale, S.A. da C.V, ‘Andon 61, cl. Alpes, O1010 México, DE. ‘Tel. y fax 699-5748, 064-4786 y 064-4856, (ISSN 0180-3884 Impreso ce Mexico . 05028 InmmopucTion* ‘The purpose of this paper is to asses the responsivences of the agarerate time-series of consumption saving to the interest rate in love developed coun- ‘aioe. Inthe development literature, much ofthe emphasis on this relationship relies on te potential to mobilize vevings through changes inthe interest raten fand ite effecta on capital accumalation and grovth. Given the theoretical ambiguity ofthis relationship, interest altachea to eanpirical ealimates. Unfor- tuataly, the Inck of lang and adequate time series, in particular interest rate ata, in most developing countries ha» rosulted in sea’ mpirical research, Basically, there have been two main approaches tothe atudy ofthe interest ato sensitivity of anving. The fret one, and mare recent, exploits the imaliew: tiona of intertemporal optimization that at optimum, the marginal rate of ‘substitution between current and future consumption is sel equal tothe margi> inal rate of transformation, This known oa the “Euler equation approach’ and ‘ismodern veroion is developed by Hall (1978) used on a model that obeys the {iraterdoe conditions for a fally rational and forward-lecking representative ‘consumer. This model allows us to estimate the coefficient of intertemporal ‘lasticty of substitution. Some reeuls for developing countrice are Giovanni (2986), Rows (1088), Raut and Virment (1900), Ontry and Reinhart (1001), and Villagemes (1692) ‘The second approach, a more traditional one, refers to atudies that lok for 8 direct effect of tho intrest rate cn saving, bsod mainly on uggregute consump tion or saving functions. For example, Fry (1978), one of the most Frequently ‘ited recent empirical papers fr leo developed countries, etimates the reepan- siveneas of the domestic savings rate to the veal intcreat rate in function that ‘leo includes tho rata of income growth, real per eepita income and the foreign savings ratio. A similar model was eatimaied by Giowannini (1565). Other decompose the income tzrm into ita transitory and permanent components send/or the inflation rate into its expected and tnexpected parts (Gupta, 1987). Jeet ce aon sees se ted (tn und Se ‘Overall, the empirical evidence obtained with those models haa been mixad ‘an inthe case inthe empirical literature for developed countries. Moreover, these ‘models have been widely criticized, Fer oxamplo, in some cases Uhey are bused ‘on questionable functional form assumptions. in ather eases, those models face simultaneity probleme and the exogeneity of the instruments used in the ‘otimations is questionable. There are also problems with the data because 7 8 [ALEJANDRO VILLACOMES ‘savings is not measured directly in national accounta, Ik isa residual between ‘magnitudes already messured with error. But one of the atrongest criticisms is given by Lucas (1976). In particular, he asserts that the relation between ‘consumption or saving, income and rates of return depends on a wider macroo- ‘eanomnic context and may not be stable over time. ‘An alternative way to model consumption and aaving relationships, but still inside this “traditional” line of research, is offered by the Error Correction ‘Mode). Tho approach ia basod on the single-equation error carrection methodor logy advocated by David Hendry (1983, 1986 and 189) n empirical time eerice esearch.’ This type of modal ean be interpreted as a reparameterization of nn ssuto-rogresuive distributed lag model (or a dynamic linear regression model) fand seems to be « structural representation of dynamic adjustment towards ‘tame equilibrium about which ecanomic theory can bo infarmative, while ‘short-run dynamics are data-baso determined. Unfortunately, for lees developed ‘countries there is little work done using thia methodology in coneumption ‘models that include an intorest rate variable. In a recent paper, Lahiri (1980) finds support for this particular type of model in 5 out of 8 Asian countries. Although he does not include the intarest rate variable in his final regults, he ‘meotions that cross-sectional results for a much shortar period for which the data on interest rates are readily available, fail to reveal any interest vonaitivity of savings for the countries in his sample, ‘This paper follows the latter approach. The contral objective of this exerciso {a to see if an error correction model, derived from Hendry's methodology, far ‘private from consumption (saving) and including the raal interest rate an Tagressor can be an adequate characterization of the data generating process for the countries in my sample. Additionally, the mode) includes both the {inflation rate and an inflation-uncertainty tarm. The inclusion ef these variables ‘attempts to isolate their effects on consumption and naving from those of the ‘eal intereat rate, The rest of the paper is divided into five sections. Section discunoes the methodological background of the EC model, In section 2. [present the empirien! model to be eatimated. The countries’ sample and the data set ia ‘Presented in section 3. Section 4 presents the roeulta and the final section ‘summarizes the main conclusions. 1. METHODOLOGICAL BACKGROUND? ‘Hondry's approach ia grounded in the cancept of the data generating process (GP). Basically, itis postulated that there exists a stochastic DGP defined by the ‘Seencmnic mochaniam and the associated measurement process. Thia OGP gene- ates all the relevant variables (w, t+ 1,...T) and ean be represented by the density function of those variables ‘CONSLM-TION SAVINGS, RETEREST RATES AND INFLATION 2 Dow, 19) oo where 6 isa vector of parameters ofthe process. The final objective isto obtain fan empirical model that should be interpreted as a tentatively adequate, ‘conditional data characterization of the DGP. In that eense, the properties of the ‘model are derived from the process that aclually generated the data. Starting {from a very general unrestricted model? this objective is reached by a reduction. ‘procosa that includes transforming date, marginalizing with respect to unwan- ‘ed variables, conditioning sequentially over time and contemporaneously specifying a functional form. Therefore, the model will include only a sroall subset 2, of 0, and after sequential factorization, expression (1) ean be repre sented by the following joint probability diatribution of the sample o Q T[e 1x00 Here, Dk) ia conditioned on X,_ nd y+ (8, the parametors af interest. Next, Jet 5»), 2), where x, denoica the vector of variables to be modelled and % dlencten the vestr of Variabew not modelled. Ate conditioning on contempo! rrancous 2, expression (2)can be rewriten an @ [P96 7440 TT DG 1, 49) where 2» (2,2), « transformation of y to sustain the factorization. The first term is the conditional model af, while the second term i the raarginal model for £, Here, zis required to be weakly exogenous tothe parameters of interes? {tosuslain valid and efficient inferences withthe conditional mae, Technically, 48 definod as weakly exogenous fora sctof parameter of intcreat p= [8 in.a conditional modelo with parameters ,if@) pis a function ofthe parameters 4 alone and 4) a, and the parameters 3 are variation roo wo that (4) are elements of A, Az the Cartesian product of the parameter spacer of the somponents votiors(Eingelet a, 1083) The variation free condition implies thal 4, and , impose no restrilions on each ther and all the parameters of interest san bo obtained from 4, alone. Thia definition sllows for the possibilty of feedback, for exemple fy,_,ontoz inthe marginal model (3). Iino such feedback ‘occur, that i, ify does nol Granger-Cause z, thon wo have atrong exogencity. J moat canes, wea oxogenelty is encugh for tenting hypethiexen* ‘Toget an operations| model, the next stzp into restrict ourselves to a opecifc. functional form, for example, to « linear appreximation given by the following ssuloreprensive distributed lg form » ALEJANDRO VILLAGOMEZ ayy, BUDE, +, o where L is the ing operator, a{L) and ({L) denotes lag polynomials, « and B are ‘vectors including the parameters of interest, which are assumed constant, and.

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