Unobserved components in an error-correction model of consumption for Southern European countries

Nicholas Sarantis () and Chris Stewart
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Nicholas Sarantis: Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N2EY, UK

Empirical Economics, 2001, vol. 26, issue 2, 405 pages

Abstract: In this paper we show how the potential misspecification of the consumption function can be ameliorated by approximating any unmodelled long run variation with an unobserved component in the form of a time-varying trend. This methodology is applied to Greek, Portuguese and Spanish consumption functions during the post-second World war period. The empirical evidence suggests that there are many determinants of long-run consumption in these countries, in addition to income and inflation, and these unobserved long-run effects are captured by a nonstationary stochastic component. The long-run elasticity of consumption with regards to the unobserved component is greater than unity in all countries.

Keywords: Unobserved Components; Consumption; Southern Europe (search for similar items in EconPapers)
JEL-codes: C51 C52 D12 (search for similar items in EconPapers)
Date: 2001-05-21
Note: received: January 1999/Final version received: June 2000
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Citations: View citations in EconPapers (11)

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