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Modelling Aggregate Consumption Growth with Time-Varying Parameters

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  • Arns, Jürgen
  • Bhattacharya, Kaushik

Abstract

Using the Family Expenditure Survey (FES) data for the United Kingdom (UK), the paper specifies and estimates a ’complete’ Hilden- brand Kneip (HK) model of consumption, extending earlier efforts that were ’partial’ in nature. As the estimated parameters in the ’partial’ HK model are time varying, the paper provides empirical evi- dence that their movements over time reflect a near unit root process. To estimate the ’complete’ HK model, the paper specifies a simple OLS model of the ’remainder term’ in the ’partial’ HK model. The remainder term in the partial HK model, which as per theory should be influenced by unobservable variables like expectation formation of households, is found to be affected by housing prices. The complete model is found to explain movements in consumption better than the partial model. Results based on bootstrap suggest that given the sampling error in the FES data, the overall fit of the model should be considered as good.

Suggested Citation

  • Arns, Jürgen & Bhattacharya, Kaushik, 2005. "Modelling Aggregate Consumption Growth with Time-Varying Parameters," Bonn Econ Discussion Papers 15/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:152005
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    References listed on IDEAS

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    Cited by:

    1. Paluch, Michal & Kneip, Alois & Hildenbrand, Werner, 2007. "Individual versus Aggregate Income Elasticities for Heterogeneous Populations," Bonn Econ Discussion Papers 13/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    Keywords

    Aggregation; Consumption Function; Average Derivative;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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