A note on the average propensity to consume, wealth and threshold adjustment

- We explore the connection between the average propensity to consume (APC) and wealth to income ratio (WY) in the US.
- We estimate a threshold vector error correction model.
- There is evidence of cointegration.
- We find that the APC rather than WY responds to long-run disequilibrium.
- The speed of APC adjustment is fastest in regimes characterised by a high or increasing APC and/or low or decreasing WY.

We explore the connection between the average propensity to consume (APC) and wealth to income ratio (WY) in the US. We find evidence of a long-run relationship characterised by threshold error correction. It is the APC that responds to long-run disequilibrium where the speed of adjustment is asymmetric insofar as being most likely fastest in regimes characterised by a high APC and low WY.