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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.

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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 26 (2001)
Issue (Month): 2 ()
Pages: 391-405

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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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