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US inflation and consumption: A long-term perspective with a level shift

Listed author(s):
  • Paradiso, Antonio
  • Casadio, Paolo
  • Rao, B. Bhaskara

This article examines the existence and stability of the consumption function in the United States of America (US) 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 level shift into account, a cointegrating equation, including inflation, exists and is more stable for the critical sub-samples than traditional consumption function models.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999312001721
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 5 ()
Pages: 1837-1849

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1837-1849
DOI: 10.1016/j.econmod.2012.05.037
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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