Reexamining the consumption-wealth relationship: The role of model uncertainty

Arbeitspapier

In their influential work on the consumption-wealth relationship, Lettau and Ludvigson found that while consumption responds to permanent changes in wealth in the expected manner, most changes in wealth are transitory with no effect on consumption. We investigate the robustness of these results to model uncertainty using Bayesian model averaging. We find that there is model uncertainty with regard to the number of cointegrating vectors, the form of deterministic components, lag length, and whether the cointegrating residuals affect consumption and income directly. Whether this uncertainty has important implications depends on the researcher's attitude toward this economic theory used by Lettau and Ludvigson. If we work with their exact model, our findings are very similar. However, if we work with a broader set of models, we find that the exact magnitude of the role of permanent shocks is difficult to estimate precisely. Thus, although some support exists for the view that the role of shocks is small, we cannot rule out the possibility that they have a substantive effect on consumption.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 202

Classification and Topics

• Classification: Wirtschaft ; Bayesian Analysis: General ; Macroeconomics: Consumption; Saving; Wealth
• Subject: wealth effect, vector error correction model, Bayesian model averaging, cointegration, variance decomposition ; Gesamtwirtschaftlicher Konsum ; Vermögenseffekt ; Bayes-Statistik ; Kointegration ; Fehlerkorrekturmodell ; Varianzanalyse

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Koop, Gary M. ; Potter, Simon M. ; Strachan, Rodney W.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/60627
• Last update: 10.03.2025, 11:43 AM CET