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An asymmetric error correction model of UK consumer spending

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Author Info
Alan Carruth
Andrew Dickerson

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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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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 6 (January)
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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alan Carruth & Andrew Henley, 1990. "The housing market and consumer spending," Fiscal Studies, Institute for Fiscal Studies, vol. 11(3), pages 27-38, August.
  2. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September. [Downloadable!] (restricted)
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  3. Andrew Scott, 1995. "Why is Consumption so Seasonal?," Economics Working Papers 122, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  4. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 407-36, May. [Downloadable!] (restricted)
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  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. Cook, Steven & Holly, Sean & Turner, Paul, 1999. "DHSY Revisited: The Role of Asymmetries," Applied Economics, Taylor and Francis Journals, vol. 31(7), pages 775-78, July. [Downloadable!] (restricted)
  7. Harvey, Andrew & Scott, Andrew, 1994. "Seasonality in Dynamic Regression Models," Economic Journal, Royal Economic Society, vol. 104(427), pages 1324-45, November. [Downloadable!] (restricted)
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  8. Hendry, David F, 1994. "HUS Revisited," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 86-106, Summer.
  9. 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., vol. 4(S), pages S145-59, Supplemen. [Downloadable!] (restricted)
  10. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
  11. Osborn, Denise R, 1988. "Seasonality and Habit Persistence in a Life Cycle Model of Consumptio n," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 255-66, October-D. [Downloadable!] (restricted)
  12. Cook, Steven, 1999. "Nonsymmetric Error Correction Revisited," Applied Economics Letters, Taylor and Francis Journals, vol. 6(7), pages 467-70, July. [Downloadable!] (restricted)
  13. 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, vol. 88(352), pages 661-92, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
  2. Henk Don & Johan Verbruggen, 2006. "Models and methods for economic policy; 60 years of evolution at CPB," CPB Discussion Papers 55, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  3. Kurt Kratena & Ina Meyer & Michael Wüger, 2009. "Ökonomische, technologische und soziodemographische Einflussfaktoren der Energienachfrage," WIFO Working Papers 339, WIFO. [Downloadable!]
  4. 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. [Downloadable!]
  5. 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. [Downloadable!]
  6. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics. [Downloadable!]
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