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An asymmetric error correction model of UK consumer spending

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  • Alan Carruth
  • Andrew Dickerson

Abstract

This paper augments the Granger and Lee (Journal of Applied Econometrics, 4, 1989) non-symmetric error (equilibrium) correction model to assess the possibility that, in the aggregate, consumers respond differently to different types of disequilibrium error. This idea is illustrated using an Engle-Granger implementation of the Davidson, Hendry, Srba and Yeo (DHSY, Economic Journal, 80, 1978) model. The disequilibrium error is endogenously determined by the long-run, empirical model and a binary dummy variable captures two alternative states, above and below equilibrium spending. Interaction of the dummy variable with key variables in a short-run dynamic model of UK consumer spending augments the dynamics of the DHSY model. Income elasticities, inflation elasticities and speeds of adjustment are all seen to change significantly depending on whether the disequilibrium error is positive or negative, and is suggestive of asymmetric behaviour on the part of consumers. Moreover, the asymmetrically augmented model substantially outperforms a symmetric model with standard error improvements in excess of 50%.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 6 ()
Pages: 619-630

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Handle: RePEc:taf:applec:v:35:y:2003:i:6:p:619-630

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References

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  1. Scott, A., 1995. "Why id Consumption so Seasonal?," Economics Series Working Papers 99172, University of Oxford, Department of Economics.
  2. Peter C.B. Phillips & Mico Loretan, 1989. "Estimating Long Run Economic Equilibria," Cowles Foundation Discussion Papers 928, Cowles Foundation for Research in Economics, Yale University.
  3. Alan Carruth & Andrew Henley, 1990. "The housing market and consumer spending," Fiscal Studies, Institute for Fiscal Studies, vol. 11(3), pages 27-38, August.
  4. Harvey, Andrew & Scott, Andrew, 1994. "Seasonality in Dynamic Regression Models," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(427), pages 1324-45, November.
  5. Clark, Andrew E. & Oswald, Andrew J., 1994. "Satisfaction and comparison income," CEPREMAP Working Papers (Couverture Orange) 9408, CEPREMAP.
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  7. Osborn, Denise R, 1988. "Seasonality and Habit Persistence in a Life Cycle Model of Consumptio n," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 3(4), pages 255-66, October-D.
  8. Steven Cook & Sean Holly & Paul Turner, 1999. "DHSY revisited: the role of asymmetries," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 31(7), pages 775-778.
  9. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
  10. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(352), pages 661-92, December.
  11. Hendry, David F, 1994. "HUS Revisited," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 86-106, Summer.
  12. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 4(S), pages S145-59, Supplemen.
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Cited by:
  1. Nicholas Apergis & Stephen M. Miller, 2005. "Resurrecting the Wealth Effect on Consumption: Further Analysis and Extension," Working papers 2005-57, University of Connecticut, Department of Economics.
  2. Márquez, Elena & Martínez-Cañete, Ana R. & Pérez-Soba, Inés, 2013. "Wealth shocks, credit conditions and asymmetric consumption response: Empirical evidence for the UK," Economic Modelling, Elsevier, vol. 33(C), pages 357-366.
  3. repec:iab:iabzaf:v:40:i:2/3:p:221-233 is not listed on IDEAS
  4. Till van Treeck, 2008. "Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending," IMK Working Paper 06-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Kurt Kratena & Ina Meyer & Michael Wüger, 2009. "Economic, Technological and Socio-demographic Factors of Energy Demand," WIFO Working Papers, WIFO 339, WIFO.
  6. Nicholas Apergis & Stephen M. Miller, 2005. "Consumption asymmetry and the stock market: New evidence through a threshold adjustment model," Working papers 2005-08, University of Connecticut, Department of Economics.
  7. Henk Don & Johan Verbruggen, 2006. "Models and methods for economic policy; 60 years of evolution at CPB," CPB Discussion Paper 55, CPB Netherlands Bureau for Economic Policy Analysis.
  8. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics.

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