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Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending

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  • Till van Treeck

    () (IMK at the Hans Boeckler Foundation)

Abstract

Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainable

Suggested Citation

  • 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.
  • Handle: RePEc:imk:wpaper:06-2008
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_06_2008.pdf
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    References listed on IDEAS

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    1. Willman, Alpo & Whelan, Karl & Altissimo, Filippo & Georgiou, Evaggelia & Sastre, Teresa & Valderrama, Maria Teresa & Sterne, Gabriel & Stocker, Marc & Weth, Mark, 2005. "Wealth and asset price effects on economic activity," Occasional Paper Series 29, European Central Bank.
    2. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
    3. 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.
    4. Joseph G. Altonji & Aloysius Siow, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 293-328.
    5. Lonnie Stevans, 2004. "Aggregate consumption spending, the stock market and asymmetric error correction," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 191-198.
    6. George A. Akerlof, 2007. "The Missing Motivation in Macroeconomics," American Economic Review, American Economic Association, vol. 97(1), pages 5-36, March.
    7. 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.
    8. Massimo Guidolin & Elizabeth A. La Jeunesse, 2007. "The decline in the U.S. personal saving rate: is it real and is it a puzzle?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 491-514.
    9. Lavoie, Marc, 2004. "Post Keynesian consumer theory: Potential synergies with consumer research and economic psychology," Journal of Economic Psychology, Elsevier, vol. 25(5), pages 639-649, October.
    10. Karl Whelan & Filippo Altissimo & Evaggelia Georgiou & Teresa Sastre & Maria Teresa Valderrama & Gabriel Sterne & Marc Stocker & Mark Weth & Alpo Willman, 2005. "Wealth and asset price effects on economic activity," Open Access publications 10197/210, School of Economics, University College Dublin.
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    More about this item

    Keywords

    Asymmetric error correction model; consumer economics; aggregate con-sumption and wealth.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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