Consumption, cointegration and rational expectations: some australian evidence

MacDonald, R. and Kearney, C. (1990) Consumption, cointegration and rational expectations: some australian evidence. Australian Economic Papers, 29(54), pp. 40-52. (doi:10.1111/j.1467-8454.1990.tb00470.x)

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Abstract

The nature of the relationship which exists between consumption expenditures and income has been extensively researched over the last four decades. Two contrasting approaches have dominated recent investigations; namely, the backward-looking error correction model (ECM) of Davidson et al. (1978) and Hall’s (1978) forward-looking rational expectations (REPI) implementation of Friedman’s (1957) permanent income hypothesis. Both the ECM and the REPI approaches have been tested on Australian data by Bladen-Hovel1 and Richards (1983) and Johnson (1983) with mixed degrees of success.’ Recent developments in time series modelling techniques have demonstrated, however, that the relative empirical success of these models depends importantly on their sensitivity to stationarity issues. For example, the ECM owes much of its success to its ability to incorporate both stationary and non-stationary elements in explaining the dynamics which move economic systems from short to long-run equilibrium, while the REPI finding of “excessive” responsiveness of consumption expenditures to income results partly from the filtering procedures which have been employed to induce stationarity in the data (see e.g. Mankiw and Shapiro, 1985).

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: MacDonald, R., and Kearney, C.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Australian Economic Papers
Publisher:Wiley-Blackwell Publishing Ltd.
ISSN:0004-900X
ISSN (Online):1467-8454

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