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Economic Theory and Structural Time Series Models for Aggregate Consumption

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  • Franz C. Palm
  • Carlo C. A. Winder

Abstract

In this paper, we formulate a structural time series model for aggregate quarterly nondurable consumption by using the life cycle consumption hypothesis under uncertainty to obtain a model for the trend cycle component. The seasonal components are assumed to sum to a white noise. The model is analyzed using nondurable consumption expenditures per capita in constant prices for the Netherlands for the period 1967-1984. Special attention is paid to the implications of a structural change in labor income for the trend-cycle component of consumption. The model is found to be fairly well in agreement with the time series properties of consumption. An additional test based on the relationships between the income and consumption processes yields less favourable results and throws doubt on the appropriateness of the life cycle model.

Suggested Citation

  • Franz C. Palm & Carlo C. A. Winder, 1990. "Economic Theory and Structural Time Series Models for Aggregate Consumption," Annals of Economics and Statistics, GENES, issue 18, pages 25-43.
  • Handle: RePEc:adr:anecst:y:1990:i:18:p:25-43
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