The Consumption-Wealth Ratio Under Asymmetric Adjustment

Vasco Gabriel, Fernando Alexandre () and Pedro Bação

No 2007-06, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: This paper argues that nonlinear adjustment may provide a better explanation of fluctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to differ across regimes. Estimation of the system suggests that these states are related to the behaviour of financial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the first when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of a simple model of consumption under uncertainty.

Keywords: Consumption; Financial markets; Uncertainty; Forecast; Markov switching (search for similar items in EconPapers)
JEL-codes: C32 C5 E21 E44 G10 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2007
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

Published in Studies in Nonlinear Dynamics & Econometrics 12(4): article 3, 2008

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Related works:
Journal Article: The Consumption-Wealth Ratio under Asymmetric Adjustment (2008)
Working Paper: The Consumption-Wealth Ratio Under Asymmetric Adjustment (2007)
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