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Smooth transitions in a UK consumption function

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  • Eliasson, Ann-Charlotte

    (Dept. of Economic Statistics, Stockholm School of Economics)

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    Abstract

    This paper reconsiders the equilibrium correction model of nondurable consumption in the UK by Davidson et al. (1978), denoted DHSY. The DHSY model fails outside the original observation period and several studies claim that this is due to neglected nonlinearities or time-varying parameters. This paper will take both features into account simultaneously by using the methodology of smooth transition regressions (STR). The study is performed both for the original sample and for an extended one. It turns out that nonlinearities are present in both samples when keeping the original model specification. The resulting consumption functions are characterised by time-varying parameters rather than nonlinear relationships between the explanatory variables. The estimated nonlinear models encompass, and dominate in variance, their linear equivalents for each sample.

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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 328.

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    Length: 37 pages
    Date of creation: 25 Aug 1999
    Date of revision:
    Handle: RePEc:hhs:hastef:0328

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    Related research

    Keywords: DHSY; dynamic model; econometric model building; encompassing; parameter constancy; smooth transition regression;

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    Cited by:
    1. J├╝rgen Arns & Kaushik Bhattacharya, 2005. "Modelling Aggregate Consumption Growth with Time-Varying Parameters," Bonn Econ Discussion Papers, University of Bonn, Germany bgse15_2005, University of Bonn, Germany.

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