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Inflation and consumption in a long term perspective with level shift

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  • Casadio, Paolo
  • Paradiso, Antonio
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    Abstract

    This article examines the existence and stability of the consumption function in the United States of America (US) economy during a sample period, beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy we found that, after taking the shift level break into account, a cointegration including inflation exists and is more stable for the critical sub-samples than traditional consumption function models.

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    File URL: http://mpra.ub.uni-muenchen.de/25980/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25980.

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    Date of creation: 11 Sep 2010
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    Handle: RePEc:pra:mprapa:25980

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    Keywords: Consumption; Cointegration; Inflation; Shift level break;

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    1. Jeremy Rudd & Karl Whelan, 2002. "A note on the cointegration of consumption, income, and wealth," Finance and Economics Discussion Series 2002-53, Board of Governors of the Federal Reserve System (U.S.).
    2. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
    3. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
    4. Gylfason, Thorvaldur, 1981. "Interest Rates, Inflation, and the Aggregate Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 233-45, May.
    5. Jeremy Rudd & Karl Whelan, 2006. "Empirical Proxies for the Consumption-Wealth Ratio," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 34-51, January.
    6. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, vol. 93(3), pages 337-342, December.
    7. Lester D. Taylor, 1971. "Saving out of Different Types of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 2(2), pages 383-416.
    8. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-58, December.
    9. Garry MacDonald & Andy Mullineux & Rudra Sensarma, 2011. "Asymmetric effects of interest rate changes: the role of the consumption-wealth channel," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 1991-2001.
    10. Springer, William L, 1977. "Consumer Spending and the Rate of Inflation," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 299-306, August.
    11. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51.
    12. Howard, David H, 1978. "Personal Saving Behavior and the Rate of Inflation," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 547-54, November.
    13. Heien, Dale M, 1972. "Demographic Effects and the Multiperiod Consumption Function," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 125-38, Jan.-Feb..
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