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Non-linear consumption dynamics

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  • Angelos A. Antzoulatos

Abstract

Taking explicitly into account the forward-looking nature of consumption, this paper derives a non-linear equation for consumption growth in which the coefficient of contemporaneous expected income growth is an increasing (decreasing) function of lagged variables positively (negatively) correlated with future income growth. Estimating it with aggregate data, the paper finds statistically and economically significant non-linear consumption dynamics for three major industrial countries. These dynamics imply, among other things, that monetary policy may have a more immediate and profound effect on consumption, and through it on real economic activity, than commonly thought.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9726.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9726

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Keywords: Consumption (Economics) ; Monetary policy ; Econometric models;

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  1. Agell, Jonas & Berg, Lennart, 1996. " Does Financial Deregulation Cause a Consumption Boom?," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(4), pages 579-601, December.
  2. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(3), pages 265-79, July.
  3. French, Mark W & Sichel, Daniel E, 1993. "Cyclical Patterns in the Variance of Economic Activity," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(1), pages 113-19, January.
  4. Shea, John, 1995. "Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(3), pages 798-805, August.
  5. Allan D. Brunner, 1994. "On the dynamic properties of asymmetric models of real GNP," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 489, Board of Governors of the Federal Reserve System (U.S.).
  6. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1397-1408, December.
  7. Ricardo J. Caballero, 1992. "Near-Rationality, Heterogeneity and Aggregate Consumption," NBER Working Papers 4035, National Bureau of Economic Research, Inc.
  8. Kim, Chulsoo, 1996. "Measuring Deviations from the Permanent Income Hypothesis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 205-25, February.
  9. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 723-756, May.
  10. Antzoulatos, Angelos A., 1994. "Borrowing constraints, income expectations and the Euler equation : Theory and evidence," Economics Letters, Elsevier, Elsevier, vol. 45(3), pages 323-327.
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