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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.

Suggested Citation

  • Casadio, Paolo & Paradiso, Antonio, 2010. "Inflation and consumption in a long term perspective with level shift," MPRA Paper 25980, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:25980

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    References listed on IDEAS

    1. Gylfason, Thorvaldur, 1981. "Interest Rates, Inflation, and the Aggregate Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 233-245, May.
    2. Heien, Dale M, 1972. "Demographic Effects and the Multiperiod Consumption Function," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 125-138, Jan.-Feb..
    3. 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.
    4. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    5. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
    6. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51.
    7. Karl Whelan & Jeremy Rudd, 2002. "A note on the cointegration of consumption, income, and wealth," Open Access publications 10197/228, School of Economics, University College Dublin.
    8. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, vol. 93(3), pages 337-342, December.
    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. Lester D. Taylor, 1971. "Saving out of Different Types of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 383-416.
    11. Weber, Warren E, 1975. "Interest Rates, Inflation, and Consumer Expenditures," American Economic Review, American Economic Association, vol. 65(5), pages 843-858, December.
    12. 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.
    13. Howard, David H, 1978. "Personal Saving Behavior and the Rate of Inflation," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 547-554, November.
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    More about this item


    Consumption; Cointegration; Inflation; Shift level break;

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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