The Dynamics of the Brazilian Current Account with Rule of Thumb Consumers

Abstract

The traditional intertemporal current account model assumesthat all individuals follow the permanent income theory. The innovation proposed in this work is to incorporate the idea that some consumers have rule of thumb behavior with the classic current account dynamics model. The share of aggregate income that follows the rule of thumb behavior and the habit formation coefficient are estimated. Based on the current account data on the Brazilian economy, the results confirm some stylized facts presented in the literature as well as some testable basic propositions of the intertemporal current account model