Asymmetric income and wealth effects in a non-linear error correction model of US consumer spending

Till van Treeck ()
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Till van Treeck: IMK at the Hans Boeckler Foundation

No 06-2008, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainable

Keywords: Asymmetric error correction model; consumer economics; aggregate con-sumption and wealth. (search for similar items in EconPapers)
JEL-codes: C22 D11 D12 E21 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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