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Unobserved components in an error-correction model of consumption for Southern European countries


  • Nicholas Sarantis

    () (Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N2EY, UK)

  • Chris Stewart

    () (Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N2EY, UK)


In this paper we show how the potential misspecification of the consumption function can be ameliorated by approximating any unmodelled long run variation with an unobserved component in the form of a time-varying trend. This methodology is applied to Greek, Portuguese and Spanish consumption functions during the post-second World war period. The empirical evidence suggests that there are many determinants of long-run consumption in these countries, in addition to income and inflation, and these unobserved long-run effects are captured by a nonstationary stochastic component. The long-run elasticity of consumption with regards to the unobserved component is greater than unity in all countries.

Suggested Citation

  • Nicholas Sarantis & Chris Stewart, 2001. "Unobserved components in an error-correction model of consumption for Southern European countries," Empirical Economics, Springer, vol. 26(2), pages 391-405.
  • Handle: RePEc:spr:empeco:v:26:y:2001:i:2:p:391-405 Note: received: January 1999/Final version received: June 2000

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    References listed on IDEAS

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    Cited by:

    1. Chen, Xiaoshan & MacDonald, Ronald, 2014. "Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model," SIRE Discussion Papers 2015-05, Scottish Institute for Research in Economics (SIRE).
    2. Bernardina Algieri, 2011. "Modelling export equations using an unobserved component model: the case of the Euro Area and its competitors," Empirical Economics, Springer, vol. 41(3), pages 593-637, December.
    3. Everaert Gerdie, 2011. "Estimation and Inference in Time Series with Omitted I(1) Variables," Journal of Time Series Econometrics, De Gruyter, vol. 2(2), pages 1-28, January.
    4. G. Everaert, 2007. "Estimating Long-Run Relationships between Observed Integrated Variables by Unobserved Component Methods," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/452, Ghent University, Faculty of Economics and Business Administration.
    5. Xiaoshan Chen & Ronald MacDonald, 2010. "Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models," Working Papers 2010_16, Business School - Economics, University of Glasgow.
    6. Kiyotaka Sato & Junko Shimizu & Nagendra Shrestha & Shajuan Zhang, 2013. "Industry-specific Real Effective Exchange Rates and Export Price Competitiveness: The Cases of Japan, China, and Korea," Asian Economic Policy Review, Japan Center for Economic Research, vol. 8(2), pages 298-321, December.
    7. Chen, Xiaoshan & MacDonald, Ronald, 2014. "Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-05, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Bernardina Algieri, 2015. "Price and non-price competitiveness in export demand: empirical evidence from Italy," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(1), pages 157-183, February.
    9. Chen, Xiaoshan & MacDonald, Ronald, 2015. "Measuring the dollar–euro permanent equilibrium exchange rate using the unobserved components model," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 20-35.

    More about this item


    Unobserved Components; Consumption; Southern Europe;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection


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