Article ID Journal Published Year Pages File Type
5056104 Economic Modelling 2007 17 Pages PDF
Abstract

We argue that the equation commonly used in the estimation of the wealth effect on consumption might be unsuitable for that purpose. In particular, if the usual assumptions are employed, the derivation of the equation implies that the wealth effect is indeterminate. Furthermore, it implies that the estimate of the wealth effect should decrease when asset wealth volatility increases. Estimation of a Markov-switching model of the usual long-run aggregate consumption equation provides evidence favourable to the indeterminacy hypothesis.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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