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Income Persistence and Macro-Policy Feedbacks in the United States

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  • Muellbauer, John

Abstract

This paper analyses and forecasts annual time series of aggregate real income per head in the United States. The approach integrates elements from recent univariate time-series analyses with multi-equation macromodels in which policy feedback rules have been endogenized. The main conclusions are as follows. First, aggregate real per capita income is subject to significant trend reversion. This conclusion comes through more clearly by examining the data at an annual rather than the more usual quarterly frequency, and by incorporating multivariate economic content in the income process. Second, there is significant evidence for the Lucas (1976) or Haavelmo (1944) critique: in the United States there appears to have been a shift in the structural macro-policy reaction function causing a corresponding shift in the reduced-form income forecasting equation. This is associated with increased concern in the late 1980s over the size of US budget deficits. Third, with the above proviso, useful real income forecasts can be made as far as three years ahead. Finally, the paper provides empirical evidence for the effectiveness of monetary policy on real output or income. The change in the short-term interest rate is highly significant in forecasting income growth up to three years after the change.

Suggested Citation

  • Muellbauer, John, 1997. "Income Persistence and Macro-Policy Feedbacks in the United States," CEPR Discussion Papers 1557, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1557
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    Cited by:

    1. Hasan Bakhshi, 2000. "The sensitivity of aggregate consumption to human wealth," Bank of England working papers 108, Bank of England.

    More about this item

    Keywords

    Income Persistance; Lucas Critique; Macro Forecasts; Macro-Policy Feedback Rules; Monetary Policy Transmission; Structural Breaks;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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