On the stability of the wealth effect

Pedro Bação, Fernando Alexandre () and Vasco Gabriel
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Pedro Bação: University of Coimbra and GEMF

No 281, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: We argue that the equation commonly used in the estimation of the wealth effect on consumption might be unsuitable for that purpose. In particular, if the usual assumptions are employed, the derivation of the equation implies that the wealth effect is indeterminate. Furthermore, it implies that the estimate of the wealth effect should decrease when asset wealth volatility increases. Estimation of a Markov-switching model of the usual long-run aggregate consumption equation provides evidence favourable to the indeterminacy hypothesis

Keywords: Parameter instability; Markov switching; Consumption; Wealth effect (search for similar items in EconPapers)
JEL-codes: C51 C52 E21 E44 (search for similar items in EconPapers)
Date: 2006-07-04
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Related works:
Working Paper: On the Stability of the Wealth Effect (2005)
Working Paper: On the Stablity of the Wealth Effect (2005)
Working Paper: On the Stability of the Wealth Effect (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:281

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