Inflation and consumption in a long term perspective with level shift

Paolo Casadio and Antonio Paradiso ()

MPRA Paper from University Library of Munich, Germany

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

Keywords: Consumption; Cointegration; Inflation; Shift level break (search for similar items in EconPapers)
JEL-codes: C20 E21 (search for similar items in EconPapers)
Date: 2010-09-11
New Economics Papers: this item is included in nep-mon
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