A note on the cointegration of consumption, income, and wealth

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Title: A note on the cointegration of consumption, income, and wealth
Authors: Rudd, Jeremy
Whelan, Karl
Permanent link: http://hdl.handle.net/10197/228
Date: Nov-2002
Abstract: Lettau and Ludvigson (2001) argue that a log-linearized approximation to an aggregate budget constraint predicts that log consumption, assets, and labour income will be cointegrated. They conclude that this cointegrating relationship is present in U.S. data, and that the estimated cointegrating residual forecasts future asset growth. This note examines whether the cointegrating relationship suggested by Lettau and Ludvigson's theoretical framework actually exists. We demonstrate that we cannot reject the hypothesis that cointegration is absent from the data once we employ measures of consumption, assets, and labor income that are jointly consistent with an underlying budget constraint. By contrast, Lettau and Ludvigson use a set of variables that do not belong together in an aggregate budget constraint, thereby testing a cointegrating relationship that is not implied by their theory.
Type of material: Technical Report
Publisher: Central Bank of Ireland
Copyright (published version): 2002 Copyright Central Bank of Ireland
Subject LCSH: Cointegration
Consumption (Economics)
Other versions: http://www.centralbank.ie/data/TechPaperFiles/5RT02.pdf
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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