WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

40
conventional levels. Presumably this reduced interest rate effect reflects the
fact that the inclusion of wealth in the equation absorbs the wealth effect of
interest rate changes, leaving only the pure substitution effect to be picked
up by the coefficient on the real interest rate. The point estimates therefore
suggest that most of the interest rate effect in the Keynesian equation is
due to the wealth effect.
Third, note that the coefficient on the first difference of the relative
price of consumption is virtually unaffected by the inclusion of wealth, so
while relative price effects are captured by wealth in the long run, the relative
price of consumption has significant dynamic effects on consumption.
Finally, the third column of Table 8 considers the impact of substituting
total wealth in the cointegrating vector for human wealth and non-human
wealth (excluding equity) entered separately. The impact of this substitution
is relatively minor; the coefficient on the real interest rate falls marginally
and there is a small dynamic effect of changes in non-human wealth.
As for the Keynesian model, rolling Chow tests do not reject the null
of stability for the EC equations that include wealth (see Figures 11 and 12).
In addition, recursive estimates of the parameters reveal that the parameters
are reasonably stable through time. Figure 13 reports recursive estimates
for the model with human and non-human wealth (excluding
equity) included separately, but very similar results are obtained when
total wealth is used instead. Note in particular that the coefficient on the
change in unemployment is now always negative, though only significantly
so near the end of the sample. The residuals show little evidence of
significant serial dependence, but autoregressive conditional heteroscedasticity
continues to be present.