Consumption in Brazil: Myopia or liquidity constraints? A simple test using quarterly data

Several papers have put serious doubt on the validity of the life cycle-permanent income hypothesis. However, a few of them have focused on the reasons behind the failure. In this study, quarterly data from Brazil is used to check whether the rejection of the life cycle hypothesis could be attributed to the presence of either liquidity constraints or Keynesian-type consumers. The findings indicate that neither liquidity constraints nor myopic consumers could generate the finding that consumption is sensitive only to expected income declines. A possible explanation would be that consumers have some kind of loss aversion preference.