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The Consumption-Wealth Ratio Under Asymmetric Adjustment

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Author Info
Vasco Gabriel (Department of Economics, University of Surrey and NIPE, University of Minho)
Fernando Alexandre (Department of Economics and NIPE, University of Minho)
Pedro Bação () (GEMF and Faculty of Economics, University of Coimbra)

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Abstract

This paper argues that nonlinear adjustment may provide a better explanation of fluctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to differ across regimes. Estimation of the system suggests that these states are related to the behaviour of financial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the first when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of a simple model of consumption under uncertainty.

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Publisher Info
Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2007-06.

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Length: 33 pages
Date of creation: 2007
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Handle: RePEc:gmf:wpaper:2007-06

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Related research
Keywords: Consumption Financial markets Uncertainty Forecast Markov switching

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
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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. Fernando Alexandre & Pedro Bação & Vasco J. Gabriel, 2005. "On the Stablity of the Wealth Effect," NIPE Working Papers 14/2005, NIPE - Universidade do Minho. [Downloadable!]
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