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Inflation and consumption in a long term perspective with level shift

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  • Casadio, Paolo
  • Paradiso, Antonio

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.

Suggested Citation

  • Casadio, Paolo & Paradiso, Antonio, 2010. "Inflation and consumption in a long term perspective with level shift," MPRA Paper 25980, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:25980
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Cointegration; Inflation; Shift level break;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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