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An Alternative Nonlinear Perspective on the Consumption, Income and Wealth Relationship

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  • Mark J. Holmes

    ()
    (University of Waikato)

  • Xin Shen

    ()
    (University of Waikato)

Abstract

We provide new evidence on the relationship between consumption expenditure and key drivers namely, income and wealth. Using a testing procedure advocated by Bierens applied to US data, we find evidence that all series are in fact stationary around a nonlinear deterministic trend and are co-trended insofar as they share a common nonlinear deterministic trend. This can be seen in the context of cointegration-based studies that have often found against the existence of a long-run relationship. We also contribute to the ‘great ratios' debate concerning the time series properties of the average propensity to consume.

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File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P71.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 1 ()
Pages: 766-777

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Handle: RePEc:ebl:ecbull:eb-11-00699

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Keywords: Consumption; Income; Wealth; Average Propensity to Consume; Nonlinear; Co-trending.;

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  1. Perron, Pierre & Yabu, Tomoyoshi, 2009. "Testing for Shifts in Trend With an Integrated or Stationary Noise Component," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 27(3), pages 369-396.
  2. Camarero, Mariam & Ordonez, Javier, 2006. "Is there a nonlinear co-movement in the EU countries' unemployment?," Economics Letters, Elsevier, Elsevier, vol. 93(2), pages 157-162, November.
  3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 99-126, January.
  4. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Bierens, H.J., 1995. "Nonparametric cointegration analysis," Discussion Paper, Tilburg University, Center for Economic Research 1995-123, Tilburg University, Center for Economic Research.
  6. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  7. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, Elsevier, vol. 81(1), pages 29-64, November.
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