The Consumption-Wealth Ratio Under Asymmetric Adjustment

Fernando Alexandre (), Vasco J. Gabriel and Pedro Bação

No 15/2007, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: This paper argues that nonlinear adjustment may provide a better explanation of °uctuations 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 di®er across regimes. Estimation of the system suggests that these states are related to the behaviour of ¯nancial 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 ¯rst 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)
New Economics Papers: this item is included in nep-mac
Date: 2007
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Working Paper: The Consumption-Wealth Ratio Under Asymmetric Adjustment (2007)
Journal Article: The Consumption-Wealth Ratio under Asymmetric Adjustment (2008)
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