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Wealth Effects and Exogeneity: The Norwegian Consumption Function 1966(1)-1989(4)

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  • Brodin, P Anders
  • Nymoen, Ragnar

Abstract

The authors analyze the determinants of Norwegian households' consumption expenditure, using quarterly data for the period 1966(1)-1989(4). Expenditure, income and a broad measure of households wealth appear to form a cointegrating relationship. Likelihood ratio tests do not disprove that the cointegrating vector can be estimated efficiently from a single equation, i.e. a "consumption function." On this basis, a dynamic model of private expenditure is developed. Despite structural breaks in both the income and wealth processes, the consumption function displays considerable parameter constancy. Thus, the model can be attributed at least some degree of autonomy and structural invariance. On the basis of the parameter invariance tests, the "Lucas-critique" is in fact refuted. Consequently, the rational expectations approach yields (surprisingly) little insight into the causes of "breakdown" in pre-existing models. Instead their results suggest a more prosaic "left out variables" explanation, namely long-run wealth effects. Copyright 1992 by Blackwell Publishing Ltd

Suggested Citation

  • Brodin, P Anders & Nymoen, Ragnar, 1992. "Wealth Effects and Exogeneity: The Norwegian Consumption Function 1966(1)-1989(4)," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 431-454, August.
  • Handle: RePEc:bla:obuest:v:54:y:1992:i:3:p:431-54
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    Cited by:

    1. Chen, Jie, 2006. "Housing Wealth and Aggregate Consumption in Sweden," Working Paper Series 2006:16, Uppsala University, Department of Economics.
    2. Takala, Kari, 1995. "The consumption function revisited : an error-correction model for Finnish consumption," Research Discussion Papers 20/1995, Bank of Finland.
    3. Ivana Jovanović, 2016. "Modelling Consumption On The Basis Of The Complete System Of National Accounts In Serbia – The Wealth Effect," Economic Annals, Faculty of Economics, University of Belgrade, vol. 61(208), pages 49-72, January -.
    4. Eilev Jansen, 2013. "Wealth effects on consumption in financial crises: the case of Norway," Empirical Economics, Springer, vol. 45(2), pages 873-904, October.
    5. Hansen, Hermann-Josef, 1996. "Der Einfluß der Zinsen auf den privaten Verbrauch in Deutschland," Discussion Paper Series 1: Economic Studies 1996,03, Deutsche Bundesbank.
    6. Øyvind Eitrheim & Bjarne Gulbrandsen, 2001. "A model based approach to analysing financial stability," BIS Papers chapters,in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 311-330 Bank for International Settlements.

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