Re-examining the consumption-wealth relationship: The role of model uncertainty

Koop, G., Potter, S.M. and Strachan, R.W. (2008) Re-examining the consumption-wealth relationship: The role of model uncertainty. Journal of Money, Credit and Banking, 40 2-3: 341-367. doi:10.1111/j.1538-4616.2008.00116.x

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Author Koop, G.
Potter, S.M.
Strachan, R.W.
Title Re-examining the consumption-wealth relationship: The role of model uncertainty
Journal name Journal of Money, Credit and Banking   Check publisher's open access policy
ISSN 0022-2879
Publication date 2008-01-01
Year available 2008
Sub-type Article (original research)
DOI 10.1111/j.1538-4616.2008.00116.x
Open Access Status
Volume 40
Issue 2-3
Start page 341
End page 367
Total pages 27
Editor Lam, P.
Lucas, D.
Ogaki, M.
West, K.D.
Place of publication US
Publisher Wiley-Blackwell Publishing Inc
Language eng
Subject 140212 Macroeconomics (incl. Monetary and Fiscal Theory)
140302 Econometric and Statistical Methods
140305 Time-Series Analysis
910199 Macroeconomics not elsewhere classified
970101 Expanding Knowledge in the Mathematical Sciences
Abstract This paper discusses the consumption-wealth relationship. We use data on consumption, assets, and labor income and a vector error correction framework. This framework defines a set of models that differ in the number of co-integrating vectors, the form of deterministic components and tag length. Further models can be defined through parametric restrictions and, in particular, interest centers on a weak exogeneity restriction that says that the co-integrating residuals do not affect consumption and income directly. Key results in previous work relate to the roles of permanent and transitory shocks in driving wealth and how consumption responds to these shocks. We investigate the robustness of these results to model uncertainty and argue for the use of Bayesian model averaging. We find that there is a large degree of model uncertainty. Whether this uncertainty has important empirical implications depends on the researcher's attitude toward the theory used to motivate a co-integrating relationship between consumption, assets and income. If we work with models consistent with this theory and impose the weak exogeneity restriction, we find precisely estimated results that show that permanent shocks have only a small role in driving assets and that the predominant transitory shocks have little effect on consumption. These findings are consistent with the previous literature. However, if we work with a broader set of models and let the data speak, we find that the exact magnitude of the role of permanent shocks is hard to estimate precisely. Thus, although some support exists for the view that their role is small, we cannot rule out the possibility that they have a substantive role to play.
Keyword Business, Finance
Business & Economics
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: 2009 Higher Education Research Data Collection
School of Economics Publications
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Citation counts: TR Web of Science Citation Count  Cited 11 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 11 times in Scopus Article | Citations
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Created: Sun, 19 Apr 2009, 23:35:42 EST by Kaelene Matts on behalf of School of Economics