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A note on the cointegration of consumption, income, and wealth

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  • Rudd, Jeremy
  • Whelan, Karl

Abstract

Lettau and Ludvigson (2001) argue that a log-linearized approximation to an aggregate budget constraint predicts that log consumption, assets, and labour income will be cointegrated. They conclude that this cointegrating relationship is present in U.S. data, and that the estimated cointegrating residual forecasts future asset growth. This note examines whether the cointegrating relationship suggested by Lettau and Ludvigson's theoretical framework actually exists. We demonstrate that we cannot reject the hypothesis that cointegration is absent from the data once we employ measures of consumption, assets, and labor income that are jointly consistent with an underlying budget constraint. By contrast, Lettau and Ludvigson use a set of variables that do not belong together in an aggregate budget constraint, thereby testing a cointegrating relationship that is not implied by their theory.

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Bibliographic Info

Paper provided by University College Dublin in its series Open Access publications from University College Dublin with number urn:hdl:10197/228.

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Date of creation: Nov 2002
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Handle: RePEc:ner:ucddub:urn:hdl:10197/228

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Related research

Keywords: Cointegration; Consumption (Economics); Income;

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  1. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  3. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
  4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  5. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
  6. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  7. Palumbo, Michael & Rudd, Jeremy & Whelan, Karl, 2006. "On the Relationships Between Real Consumption, Income, and Wealth," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 1-11, January.
  8. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  9. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  11. repec:fth:harver:1435 is not listed on IDEAS
  12. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  13. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
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