US inflation and consumption: A long-term perspective with a level shift

Antonio Paradiso (), Paolo Casadio and B. Rao

Economic Modelling, 2012, vol. 29, issue 5, 1837-1849

Abstract: This article examines the existence and stability of the consumption function in the United States of America (US) 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 level shift into account, a cointegrating equation, including inflation, exists and is more stable for the critical sub-samples than traditional consumption function models.

Keywords: US consumption; Inflation; Interest rate; MEW; Level shift; Cointegration (search for similar items in EconPapers)
JEL-codes: C22 C32 E21 E31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:5:p:1837-1849

DOI: 10.1016/j.econmod.2012.05.037

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