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A Bivariate Integral Control Mechanism Model Of Household Consumption

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  • Jan Špitálský
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    Abstract

    It is well known among empirical data researchers in economics that short term data never reproduce theoretic (i.e. asymptotic) models. That is the reason why they have been trying to incorporate the notion of a steady-state into dynamic models, both to provide a ITameworkwithin which restrictions ITom economic theory can be imposed and to enable them to interpret the properties of the models accordingly. The idea of cointegration employed to cope with this issue is followed in this paper: On the basis of nonstochastic steady-state relationships implied by the corresponding economic theory, stochastic disequilibrium relationships among relevant variables can be developed such that these relationships will in steady-state simplifY to the nonstochastic steady-state relationships. In other words, an estimated appropriately-specified equation reproduces as its steady-state solution the economic theory ITomwhich it was derived. Consequently, it can be used as a tool for verifYingeconomic the?ries using empiricaldata. In this paper these relationships are formulated in a log-linear form. This methodology was firstly applied to modeling household consumption by Davidson, Hendry, Srba and Yeo (1978). In the case of household consumption, the underlying problematic consists of how to reconcile the short-run and long-run behaviors of consumption in an appropriately specified model, since it has been demonstrated based on empirical data for most countries that in the short-run the marginal propensity to consume is less than the average propensity to consume; in the long-run the elasticity of income with respect to consumption is equal to one, and the average propensity to consume is constant.

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    File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/48
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    Bibliographic Info

    Article provided by The Czech Econometric Society in its journal Bulletin of the Czech Econometric Society.

    Volume (Year): 5 (1998)
    Issue (Month): 7 ()
    Pages:

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    Handle: RePEc:czx:journl:v:5:y:1998:i:7:id:48

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