WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

cointegrating parameters reported in Table 6. Note that when k’ is substituted
for k, non-human wealth has significant explanatory power for consumption
based on the Phillips-Hansen and Stock-Watson estimates, and
all three estimation techniques produce very similar coefficient estimates.
Moreover, when the value of equity is entered separately with the consumption
function including y, h and k’, it has a negative coefficient that is
statistically indistinguishable from zero. The suggestion is that once we
restrict attention to assets such as housing, currency and deposits, which
have less variable returns and are more widely held, fluctuations in both
human and non-human wealth have important effects on consumption.
A fourth noteworthy result in Table 6 is that while the coefficient on
the relative price of consumption is typically negatively signed as
expected, it is only significant in the Keynesian consumption function.
Moreover, even in the Keynesian consumption function, the coefficient on
the relative price variable is significantly below that on disposable income
(which is nominal disposable income deflated by the GDP deflator). This
suggests that the GDP deflator is preferred empirically in both the
Keynesian and wealth-based consumption functions.
The above inferences all assume that the long-run parameters
reported in Table 6 are constant, but if in fact they are changing through
time, these inferences are invalid. In order to test for this type of
misspecification, Hansen’s (1992) tests for parameter non-constancy for I(1)
processes are applied to the three most interesting long-run equations.
Hansen proposes three tests – SupF, MeanF and Lc – which all share the null
of parameter constancy but differ in their alternatives. SupF tests for a
structural break of unknown timing and is therefore appropriate for determining
if there has been a swift shift in regime, while MeanF and Lc model
the parameters as a martingale under the alternative, so change is viewed
as a gradual process. The test statistics together with their probability values
are reported in Table 7 and refer to the Phillips-Hansen parameter estimates
reported in Table 6.
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