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An Alternative Nonlinear Perspective on the Consumption, Income and Wealth Relationship

Author

Listed:
  • Mark J. Holmes

    () (University of Waikato)

  • Xin Shen

    () (University of Waikato)

Abstract

We provide new evidence on the relationship between consumption expenditure and key drivers namely, income and wealth. Using a testing procedure advocated by Bierens applied to US data, we find evidence that all series are in fact stationary around a nonlinear deterministic trend and are co-trended insofar as they share a common nonlinear deterministic trend. This can be seen in the context of cointegration-based studies that have often found against the existence of a long-run relationship. We also contribute to the ‘great ratios' debate concerning the time series properties of the average propensity to consume.

Suggested Citation

  • Mark J. Holmes & Xin Shen, 2012. "An Alternative Nonlinear Perspective on the Consumption, Income and Wealth Relationship," Economics Bulletin, AccessEcon, vol. 32(1), pages 766-777.
  • Handle: RePEc:ebl:ecbull:eb-11-00699
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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P71.pdf
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    References listed on IDEAS

    as
    1. Perron, Pierre & Yabu, Tomoyoshi, 2009. "Testing for Shifts in Trend With an Integrated or Stationary Noise Component," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(3), pages 369-396.
    2. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    3. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
    4. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    5. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    6. Camarero, Mariam & Ordonez, Javier, 2006. "Is there a nonlinear co-movement in the EU countries' unemployment?," Economics Letters, Elsevier, vol. 93(2), pages 157-162, November.
    7. Bierens, Herman J., 1997. "Nonparametric cointegration analysis," Journal of Econometrics, Elsevier, vol. 77(2), pages 379-404, April.
    8. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, vol. 81(1), pages 29-64, November.
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    Citations

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    Cited by:

    1. Mark J. HOLMES & Xin SHEN, 2015. "On Wealth Volatility, Asymmetries And The Average Propensity To Consume In The United States," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 15(1), pages 69-78.

    More about this item

    Keywords

    Consumption; Income; Wealth; Average Propensity to Consume; Nonlinear; Co-trending.;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E0 - Macroeconomics and Monetary Economics - - General

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