The Long-Run Australian Consumption Function Reexamined: An Empirical Exercise in Bayesian Influence

Peter Phillips

No 1000, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper reports an empirical application of new Baynesian methodology to Australian data on consumption, income, liquid assets and inflation. The methods involve the use of objective model based reference priors and objective posterior odds test criteria. The paper provides an overview of this methodology, which is based on recent work by the author (1991) and joint work with Werner Ploberger (1991) and Eric Zivot (1991). The empirical application involves tests of nonstationarity and cointegration in the data and various long-run model specifications are studied in detail. Bayesian empirical results are presented alongside well-known classical tests and are shown to provide especially useful evidence in cases where the classical test results are mixed. Our empirical results show that real private consumption expenditure and household disposal income are not cointegrated either in real or nominal terms. Instead we find strong empirical support for the inclusion of an inflation or relative capital loss measure in the Australian consumption function. Suitable measures of these variables are constructed and a final specification is recommended which yields a long-run cointegrating relation that is empirically compatible in real and nominal terms.

Keywords: Bayes model; cointegration; consumption function; steady state; unit root; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C22 C51 C52 D12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1991-10
Note: CFP 825.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Colin Hargreaves, eds., Macroeconomic Modelling of the Long Run, 1992, pp. 287-322

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