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Inflation and consumption in a long term perspective with level shift

  • Casadio, Paolo
  • Paradiso, Antonio

This article examines the existence and stability of the consumption function in the United States of America (US) economy during a sample period, beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy we found that, after taking the shift level break into account, a cointegration including inflation exists and is more stable for the critical sub-samples than traditional consumption function models.

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File URL: https://mpra.ub.uni-muenchen.de/25980/1/MPRA_paper_25980.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25980.

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Date of creation: 11 Sep 2010
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Handle: RePEc:pra:mprapa:25980
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  1. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, vol. 93(3), pages 337-342, December.
  2. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  3. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-58, December.
  4. Gylfason, Thorvaldur, 1981. "Interest Rates, Inflation, and the Aggregate Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 233-45, May.
  5. Howard, David H, 1978. "Personal Saving Behavior and the Rate of Inflation," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 547-54, November.
  6. Rudd, Jeremy & Whelan, Karl, 2002. "A Note on the Cointegration of Consumption, Income, and Wealth," Research Technical Papers 5/RT/02, Central Bank of Ireland.
  7. Lester D. Taylor, 1971. "Saving out of Different Types of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 2(2), pages 383-416.
  8. Heien, Dale M, 1972. "Demographic Effects and the Multiperiod Consumption Function," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 125-38, Jan.-Feb..
  9. Jeremy Rudd & Karl Whelan, 2006. "Empirical Proxies for the Consumption-Wealth Ratio," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 34-51, January.
  10. Springer, William L, 1977. "Consumer Spending and the Rate of Inflation," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 299-306, August.
  11. Garry MacDonald & Andy Mullineux & Rudra Sensarma, 2011. "Asymmetric effects of interest rate changes: the role of the consumption-wealth channel," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 1991-2001.
  12. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
  13. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," Economics Working Paper Archive 535, The Johns Hopkins University,Department of Economics.
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