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© 2000 International Bank for Reconstruction and Development / The World Bank

research-article

What Drives Consumption Booms?

Peter J. Montiel

professor in the Department of Economics at Williams College pmontiel{at}williams.edu

Consumption booms have been common in both industrial and developing countries, and several explanations have been offered for their occurrence. These include economywide wealth effects associated with favorable movements in the terms of trade or euphoric expectations triggered by macroeconomic reforms, Ricardian effects associated with fiscal stabilization, lending booms following financial liberalization, and a variety of distortions in intertemporal relative prices. Using a large cross-country sample of booms, this article assesses how widely applicable these explanations are. The key finding is that wealth effects linked to favorable movements in the terms of trade and anticipated improvements in macroeconomic performance seem to have been more important empirically than explanations relying primarily on fiscal phenomena or distortions in intertemporal relative prices.


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