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Unobserved components in an error-correction model of consumption for Southern European countries

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  • Nicholas Sarantis

    ()
    (Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N2EY, UK)

  • Chris Stewart

    ()
    (Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N2EY, UK)

Abstract

In this paper we show how the potential misspecification of the consumption function can be ameliorated by approximating any unmodelled long run variation with an unobserved component in the form of a time-varying trend. This methodology is applied to Greek, Portuguese and Spanish consumption functions during the post-second World war period. The empirical evidence suggests that there are many determinants of long-run consumption in these countries, in addition to income and inflation, and these unobserved long-run effects are captured by a nonstationary stochastic component. The long-run elasticity of consumption with regards to the unobserved component is greater than unity in all countries.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 26 (2001)
Issue (Month): 2 ()
Pages: 391-405

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Handle: RePEc:spr:empeco:v:26:y:2001:i:2:p:391-405

Note: received: January 1999/Final version received: June 2000
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Keywords: Unobserved Components; Consumption; Southern Europe;

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Cited by:
  1. G. Everaert, 2007. "Estimating Long-Run Relationships between Observed Integrated Variables by Unobserved Component Methods," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/452, Ghent University, Faculty of Economics and Business Administration.
  2. Bernardina Algieri, 2011. "Modelling export equations using an unobserved component model: the case of the Euro Area and its competitors," Empirical Economics, Springer, vol. 41(3), pages 593-637, December.

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