Temporary shocks, consumption smoothing and economic adjustment: Sri Lanka, 1973-76
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Date
1994-07
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Latrobe University
Abstract
Many trade and supply shocks are temporary and even quite large shocks have only relatively minor permanent income effects. If agents have access to well functioning capital markets and correctly anticipate that the shocks are temporary,then the permanent income hypothesis predicts that such shocks lead primarily to changes in saving rather than in expenditures. The ''Theory of construction booms'' hypothesises that the degree of international capital mobility influences the subsequent patterns of economic adjustment. This paper examines the impact of negative shocks during the 1973-76 period in Sri Lanka, and finds support for consumption smoothing behavior by private agents and more generally, for the predictions of the above theory.
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Temporary shocks, Consumption smoothing, economic adjustment, Sri Lanka