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Structural cointegrated models of US consumption and wealth

  • Fisher, Lance A.
  • Huh, Hyeon-seung
  • Otto, Glenn

Two structural cointegrated models of consumption, labor income and wealth are specified and estimated with US data using the approach of Pagan and Pesaran (2008). We find that consumption and labor income are weakly exogenous in the estimated reduced form model and show that this imposes restrictions on the structural model. These restrictions imply that the structural shock with transitory effects can only appear in the structural equation for wealth. One of our structural models yields two permanent shocks that are identical to those obtained by Lettau and Ludvigson (2011) using the method of Gonzalo and Ng (2001). Following Lettau and Ludvigson we interpret the shocks as a productivity shock and a reallocation shock. The reallocation shock has an inverse effect on labor income and wealth, but has little effect on consumption, a result that is consistent with the permanent income hypothesis. Using an alternative restriction – which allows consumption growth to respond to contemporaneous labor income growth – to identify the two permanent shocks produces one important difference in our results. The reallocation shock now has a pronounced effect on consumption, a finding that can be explained if a sizable proportion of consumers are liquidity constrained.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 1111-1124

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:1111-1124
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Gonzalo, J. & Ng, S., 1996. "A Systematic Framework for Analyzing the Dynamic Effects of Permanent and Transitory Shocks," Cahiers de recherche 9603, Universite de Montreal, Departement de sciences economiques.
  2. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  4. Martin Lettau & Sydney C. Ludvigson, 2011. "Shocks and Crashes," NBER Working Papers 16996, National Bureau of Economic Research, Inc.
  5. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  6. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  7. Pagan, A.R. & Pesaran, M. Hashem, 2008. "Econometric analysis of structural systems with permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3376-3395, October.
  8. repec:hal:journl:hal-00287137 is not listed on IDEAS
  9. Fisher, Lance A. & Huh, Hyeon-Seung & Summers, Peter M., 2000. "Structural Identification of Permanent Shocks in VEC Models: A Generalization," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 53-68, January.
  10. repec:fth:harver:1435 is not listed on IDEAS
  11. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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