Retail sales and the prime interest rate under certainty : the case of Puerto Rico

Abstract

Given Fisher’s n-period model and Friedman’s permanent income hypothesis, this paper evaluates the effects of the benchmark rate (Prime Interest Rate) in Puerto Rico over the expected retail sales. To analyze this relation, we measure demand shocks through a consumers' risk aversion model. According to the methodology and the results, the real prime interest rate and previous period consumption determine the expected retail sales. So, we conclude that consumers adjust their spending estimates according to their current utility levels, which do not affect permanent income.