WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

First, there is little evidence that consumption is cointegrated with
either total wealth or its human and non-human components – both the
ADF test and the Phillips-Ouliaris (PO) test fail to reject the null of no
cointegration at even a 10 per cent level.
Second, the evidence that consumption is cointegrated with disposable
income is mixed. The ADF tests fails to reject the null of no cointegration
at a 10 per cent level, while the PO test rejects the same null at the 5 per
cent level.
Third, when disposable income and either total wealth or human
and non-human wealth are included in the cointegrating vector, there is
more convincing evidence of cointegration. Both the ADF and PO statistics
reject the null of no cointegration at the 5 per cent level in all the long-run
regressions that include wealth, and for the PO statistic this null is also
rejected at the 1 per cent level. The one caveat is that the ADF statistics are
somewhat sensitive to the number of lagged differences that are included
in the ADF regression, but this problem should be minimized through use
of the lag-length selection procedure advocated by Hall (1989).
A fourth finding is that the relative price of consumption p plays a
minor role in the cointegration results. The lower panel of Table 5 reports
the results when p is omitted from the cointegrating vector, and the test statistics
change very little. Overall, the results suggest that both disposable
income and wealth are important long-run determinants of consumption,
while the relative price of consumption is not. An examination of the
cointegrating vector itself bolsters this conclusion.
Table 6 reports the estimated long-run coefficients on disposable
income, wealth and the relative price of consumption. The top panel of the
table reports the Engle-Granger static ordinary least squares (OLS) estimates
on which the Table 5 cointegration tests are based. These parameter
estimates, while super-consistent (Engle and Granger 1987), are not efficient,
and their distributions are unknown. To obtain more efficient estimates
and perform valid inference on the long-run parameters, the
cointegrating parameters are also estimated by means of the prewhitened
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