This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Reexamining the consumption-wealth relationship: the role of model uncertainty

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Gary Koop
Simon M. Potter
Rodney W. Strachan

Additional information is available for the following registered author(s):

Abstract

In their influential work on the consumption-wealth relationship, Lettau and Ludvigson found that while consumption responds to permanent changes in wealth in the expected manner, most changes in wealth are transitory with no effect on consumption. We investigate the robustness of these results to model uncertainty using Bayesian model averaging. We find that there is model uncertainty with regard to the number of cointegrating vectors, the form of deterministic components, lag length, and whether the cointegrating residuals affect consumption and income directly. Whether this uncertainty has important implications depends on the researcher's attitude toward this economic theory used by Lettau and Ludvigson. If we work with their exact model, our findings are very similar. However, if we work with a broader set of models, we find that the exact magnitude of the role of permanent shocks is difficult to estimate precisely. Thus, although some support exists for the view that the role of shocks is small, we cannot rule out the possibility that they have a substantive effect on consumption.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.newyorkfed.org/research/staff_reports/sr202.html
File Format: text/html
File Function:
Download Restriction: no
File URL: http://www.newyorkfed.org/research/staff_reports/sr202.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 202.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:fip:fednsr:202

Contact details of provider:
Postal: 33 Liberty Street, New York, NY 10045-0001
Email:
Web page: http://www.newyorkfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.ny.frb.org/rmaghome/staff_rp/

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Consumption (Economics) ; Wealth ; Econometric models ; Uncertainty;

Other versions of this item:

This paper has been announced in the following NEP Reports: 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. repec:rus:hseeco:70719 is not listed on IDEAS
  2. Timothy Cogley & Thomas Sargent, . "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US," Working Papers 2133503, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
  3. Carmen Fernandez & Eduardo Ley & Mark Steel, 1999. "Model uncertainty in cross-country growth regressions," Econometrics 9903003, EconWPA, revised 06 Oct 2001. [Downloadable!]
    Other versions:
  4. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report 93, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. R.W. Strachan & H.K. Van Dijk, 2003. "The value of structural information in the VAR model," Econometric Institute Report 322, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
    Other versions:
  6. Chikuse, Yasuko, 1990. "The matrix angular central Gaussian distribution," Journal of Multivariate Analysis, Elsevier, vol. 33(2), pages 265-274, May. [Downloadable!] (restricted)
  7. Centoni, Marco & Cubadda, Gianluca, 2003. "Measuring the business cycle effects of permanent and transitory shocks in cointegrated time series," Economics Letters, Elsevier, vol. 80(1), pages 45-51, July. [Downloadable!] (restricted)
  8. Kleibergen, Frank & Paap, Richard, 2002. "Priors, posteriors and bayes factors for a Bayesian analysis of cointegration," Journal of Econometrics, Elsevier, vol. 111(2), pages 223-249, December. [Downloadable!] (restricted)
    Other versions:
  9. Strachan, Rodney W. & Inder, Brett, 2004. "Bayesian analysis of the error correction model," Journal of Econometrics, Elsevier, vol. 123(2), pages 307-325, December. [Downloadable!] (restricted)
  10. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  11. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September. [Downloadable!]
    Other versions:
  12. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06. [Downloadable!] (restricted)
  13. Strachan, Rodney W, 2003. "Valid Bayesian Estimation of the Cointegrating Error Correction Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 185-95, January.
    Other versions:
  14. Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March. [Downloadable!] (restricted)
    Other versions:
  15. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May. [Downloadable!] (restricted)
  16. Paap, R. & Kleibergen, F., 1998. "Prior, Posterios and Bayes Factors for Bayesian Analysis of Cointegration," Papers 9821/a, Erasmus University of Rotterdam - Econometric Institute.
  17. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  18. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  19. Rudd, Jeremy & Whelan, Karl, 2002. "A Note on the Cointegration of Consumption, Income, and Wealth," Research Technical Papers 5/RT/02, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
    Other versions:
  20. Hjort N.L. & Claeskens G., 2003. "Frequentist Model Average Estimators," Journal of the American Statistical Association, American Statistical Association, vol. 98, pages 879-899, January. [Downloadable!] (restricted)
  21. Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1527-1546, October. [Downloadable!] (restricted)
    Other versions:
Full references

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. Todd E. Clark & Michael W. McCracken, 2006. "Averaging forecasts from VARs with uncertain instabilities," Research Working Paper RWP 06-12, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  2. Mattias Villani, 2009. "Steady-state priors for vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(4), pages 630-650. [Downloadable!]
  3. Gary Koop & Roberto Leon-Gonzalez & Rodney W. Strachan, 2008. "Dynamic probabilities of restrictions in state space models: An application to the Phillips curve," Working Paper Series 26-08, Rimini Centre for Economic Analysis, revised Jan 2008. [Downloadable!]
Statistics
Access and download statistics

Did you know? Over 1000 institutions contribute their bibliographic data directly to this service.

This page was last updated on 2009-11-18.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.