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Articles • Rev. Bras. Econ. 69 (3) • Apr-Jun 2015 • https://doi.org/10.5935/0034-7140.20150017   copy

Testing the Optimality of Consumption Decisions of the Representative Household: Evidence from Brazil* * This article is a revised version of Marcos Gesteira’s Master Thesis, done under the supervision of Carlos Enrique Carrasco-Gutierrez. We gratefully acknowledge the comments and suggestions Fabio Reis Gomes, Wilfredo Maldonado, José Angelo Divino and seminar participants at UCB Brasília and Sociedade Brasileira de Econometria–SBE conference in Natal, 2014. We thank an anonymous referee and Alexandre B. Cunha (Editor) for the suggestions on an earlier version of this article.

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This paper investigates whether there is a fraction of consumers that do not behave as fully forward-looking optimal consumers in the Brazilian economy. The generalized method of moments technique was applied to nonlinear Euler equations of the consumption-based capital assets model contemplating utility functions with time separability and non-separability. The results show that when the household utility function was modeled as constant relative risk aversion, external habits and Kreps–Porteus, estimates of the fraction of rule-of-thumb households was, respectively, 89%, 78% and 22%. According to this, a portion of disposable income goes to households who consume their current incomes in violation of the permanent income hypothesis.

Keywords:
CCAPM; Rule of Thumb; Aggregate Consumption; Permanent Income Hypothesis; Euler Equations

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