Working Paper: CEPR ID: DP9658
Authors: Markus Brckner; Mark Gradstein
Abstract: This paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries. To identify exogenous, unanticipated, idiosyncratic and transitory variations in national output we use year-to-year variations in rainfall as an instrumental variable in a panel of 39 sub-Saharan African countries during the period 1980-2009. Our estimates yield a marginal propensity to consume out of transitory output of around 0.2. To explain this result we show, using instrumental variables techniques, that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance. An important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries.
Keywords: consumption; international capital flows; net current transfers; permanent income hypothesis; risk sharing; transitory output shocks
JEL Codes: E21; F32; F35; F41; O55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rainfall (Q54) | GDP (E20) |
| GDP (E20) | Private Consumption (D12) |
| Rainfall (Q54) | Private Consumption (D12) |
| Transitory Output Shocks (E39) | Net Current Transfers (F16) |
| Transitory Output Shocks (E39) | Trade Balance (F14) |
| Transitory Output Shocks (E39) | Private Consumption (D12) |