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An asymmetric error correction model of UK consumer spending

Author

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  • Alan Carruth
  • Andrew Dickerson

Abstract

This paper augments the Granger and Lee (Journal of Applied Econometrics, 4, 1989) non-symmetric error (equilibrium) correction model to assess the possibility that, in the aggregate, consumers respond differently to different types of disequilibrium error. This idea is illustrated using an Engle-Granger implementation of the Davidson, Hendry, Srba and Yeo (DHSY, Economic Journal, 80, 1978) model. The disequilibrium error is endogenously determined by the long-run, empirical model and a binary dummy variable captures two alternative states, above and below equilibrium spending. Interaction of the dummy variable with key variables in a short-run dynamic model of UK consumer spending augments the dynamics of the DHSY model. Income elasticities, inflation elasticities and speeds of adjustment are all seen to change significantly depending on whether the disequilibrium error is positive or negative, and is suggestive of asymmetric behaviour on the part of consumers. Moreover, the asymmetrically augmented model substantially outperforms a symmetric model with standard error improvements in excess of 50%.

Suggested Citation

  • Alan Carruth & Andrew Dickerson, 2003. "An asymmetric error correction model of UK consumer spending," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 619-630.
  • Handle: RePEc:taf:applec:v:35:y:2003:i:6:p:619-630 DOI: 10.1080/0003684022000035782
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    References listed on IDEAS

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    Cited by:

    1. Kurt Kratena & Ina Meyer & Michael Wüger, 2009. "Economic, Technological and Socio-demographic Factors Impacting on Energy Demand," WIFO Monatsberichte (monthly reports), WIFO, vol. 82(7), pages 525-538, July.
    2. Nicholas Apergis & Stephen M. Miller, 2004. "Consumption Asymmetry and the Stock Market: Further Evidence," Working papers 2004-19, University of Connecticut, Department of Economics.
    3. F. J. H. Don & J. P. Verbruggen, 2006. "Models and methods for economic policy: 60 years of evolution at CPB," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 60(2), pages 145-170.
    4. repec:iab:iabzaf:v:40:i:2/3:p:221-233 is not listed on IDEAS
    5. Márquez, Elena & Martínez-Cañete, Ana R. & Pérez-Soba, Inés, 2013. "Wealth shocks, credit conditions and asymmetric consumption response: Empirical evidence for the UK," Economic Modelling, Elsevier, vol. 33(C), pages 357-366.
    6. Nicholas Apergis & Stephen M. Miller, 2005. "Consumption asymmetry and the stock market: New evidence through a threshold adjustment model," Working papers 2005-08, University of Connecticut, Department of Economics.
    7. Nicholas Apergis & Stephen M. Miller, 2005. "Resurrecting the Wealth Effect on Consumption: Further Analysis and Extension," Working papers 2005-57, University of Connecticut, Department of Economics.
    8. Kurt Kratena & Ina Meyer & Michael Wüger, 2009. "Economic, Technological and Socio-demographic Factors of Energy Demand," WIFO Working Papers 339, WIFO.
    9. Till van Treeck, 2008. "Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending," IMK Working Paper 06-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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