Models of total private consumption in Denmark

In this paper we present and compare three different models of total private consumption in Denmark. The first is a ’standard’ macroeconometric consumption function inspired by the celebrated DHSY (1978) study. The second is a linear consumption function based on a classical rational-expectations version of the life-cycle and permanent income models. The third formulation is a mixed log-linear approximation of the classical rational-expectations model. We estimate and compare different versions of the three models and show that it is very difficult to select a single model if the choice is to be made on statistical properties, including model diagnostics and predictive power. In order to highlight the effect of the different specifications we select four rival models and include each of these in ADAM April 2000. We subsequently present the predicted impact on consumption and GDP of two standard policy experiments. The result of this exercise is that the different models lead to very similar results regarding the effect of policy changes. Since neither statistical tests nor macroeconometric model properties, as evaluated in ADAM, allow us to prefer one functional form over the others, one should choose the theoretically more appealing function.