Predictability of the Brazilian consumption growth: the relevance of anticipated growth rates in income and credit

Abstract

The well-known predictability of the consumption growth rate directly violates the permanent income hypothesis. This paper reexamines the Brazilian case taking into account usual predictors-the expected returns on assets, the anticipated income growth rate, and the lagged consumption growth rate-and a novel predictor, the anticipated credit growth rate. To accomplish this, we investigate the presence of weak instruments and apply the suitable econometric tools to handle them. The findings suggest that estimations are plagued by weak instruments, and the point estimates suggest that growth rates in income and credit are relevant predictability factors. Finally, valid (robust) confidence intervals suggest that the income growth rate and/or the credit growth rate have significant predictive power for the Brazilian growth rate in consumption.