Inflation and consumption in a long term perspective with level shift

Casadio, Paolo and Paradiso, Antonio (2010): Inflation and consumption in a long term perspective with level shift.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumption, Cointegration, Inflation, Shift level break
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C20 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

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