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Wealth Effects and Exogeneity: The Norwegian Consumption Function 1966(1)-1989(4)

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  • Brodin, P Anders
  • Nymoen, Ragnar
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    Abstract

    The authors analyze the determinants of Norwegian households' consumption expenditure, using quarterly data for the period 1966(1)-1989(4). Expenditure, income and a broad measure of households wealth appear to form a cointegrating relationship. Likelihood ratio tests do not disprove that the cointegrating vector can be estimated efficiently from a single equation, i.e. a "consumption function." On this basis, a dynamic model of private expenditure is developed. Despite structural breaks in both the income and wealth processes, the consumption function displays considerable parameter constancy. Thus, the model can be attributed at least some degree of autonomy and structural invariance. On the basis of the parameter invariance tests, the "Lucas-critique" is in fact refuted. Consequently, the rational expectations approach yields (surprisingly) little insight into the causes of "breakdown" in pre-existing models. Instead their results suggest a more prosaic "left out variables" explanation, namely long-run wealth effects. Copyright 1992 by Blackwell Publishing Ltd

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    Bibliographic Info

    Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

    Volume (Year): 54 (1992)
    Issue (Month): 3 (August)
    Pages: 431-54

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    Handle: RePEc:bla:obuest:v:54:y:1992:i:3:p:431-54

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    Cited by:
    1. Eilev S. Jansen, 2010. "Wealth effects on consumption in financial crises: the case of Norway," Discussion Papers 616, Research Department of Statistics Norway.
    2. Janine Aron & John Muellbauer, 2006. "Housing Wealth, Credit Conditions and Consumption," CSAE Working Paper Series 2006-08, Centre for the Study of African Economies, University of Oxford.

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