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Econometric Evaluation of Consumers' Expenditure Equations

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  • Church, Keith B
  • Smith, Peter N
  • Wallis, Kenneth F

Abstract

Large errors in forecasting consumption in the late 1980s and early 1990s were a major contribution to the poor performance in economic forecasting overall. These errors have been attributed to the inability of existing models to capture important influences on consumer behavior, such as the effects of financial deregulation and shifts in expectations. Revisions to models followed their failure to predict the late 1980s boom; an important question is whether these developments help to explain the unanticipated downturn in consumers' expenditure in the early 1990s. This article presents an appraisal of eight recent U.K. consumption functions. It is found that these models can explain much of the rise in consumption in the late 1980s. However, forecast errors for the early 1990s, while within the historical range, are predominantly negative. The nature of this overprediction suggests that further research on household finances, including the role of housing as collateral, is required. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Church, Keith B & Smith, Peter N & Wallis, Kenneth F, 1994. "Econometric Evaluation of Consumers' Expenditure Equations," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 71-85, Summer.
  • Handle: RePEc:oup:oxford:v:10:y:1994:i:2:p:71-85
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    Cited by:

    1. Kim, Byung Yeon, 1997. "Soviet Household Saving Function," Economic Change and Restructuring, Springer, vol. 30(2-3), pages 181-203.
    2. Maclennan, Duncan & Muellbauer, John & Stephens, Mark, 1998. "Asymmetries in Housing and Financial Market Institutions and EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 54-80, Autumn.
    3. S. Sgherri, 1999. "Monetary transmission channels, monetary regimes and consumption behaviour," WO Research Memoranda (discontinued) 602, Netherlands Central Bank, Research Department.
    4. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
    5. David Begg & Stephany Griffith-Jones, 1998. "Swinging since the 60's: Fluctuations in UK Saving and Lessons for Latin America," Research Department Publications 3032, Inter-American Development Bank, Research Department.
    6. K Alec Chrystal & Paul Mizen, 2001. "Consumption, money and lending: a joint model for the UK household sector," Bank of England working papers 134, Bank of England.
    7. Khoon Lek Goh & Richard Downing, 2002. "Modelling New Zealand Consumption Expenditure over the 1990s," Treasury Working Paper Series 02/19, New Zealand Treasury.
    8. Caporale, Guglielmo Maria & Williams, Geoffrey, 2001. "Monetary Policy and Financial Liberalization: The Case of United Kingdom Consumption," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 177-197, April.
    9. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    10. Church, Keith B. & Curram, Stephen P., 1996. "Forecasting consumers' expenditure: A comparison between econometric and neural network models," International Journal of Forecasting, Elsevier, vol. 12(2), pages 255-267, June.
    11. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
    12. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.

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