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US inflation and consumption: A long-term perspective with a level shift

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  • Paradiso, Antonio
  • Casadio, Paolo
  • Rao, B. Bhaskara
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    Abstract

    This article examines the existence and stability of the consumption function in the United States of America (US) beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy, we found that after taking the level shift into account, a cointegrating equation, including inflation, exists and is more stable for the critical sub-samples than traditional consumption function models.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312001721
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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 5 ()
    Pages: 1837-1849

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1837-1849

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: US consumption; Inflation; Interest rate; MEW; Level shift; Cointegration;

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    References

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    Cited by:
    1. Caporale, Guglielmo Maria & Costantini, Mauro & Paradiso, Antonio, 2013. "Re-examining the decline in the US saving rate: The impact of mortgage equity withdrawal," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 215-225.

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