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SOME THEORETICAL WORK ON THE CONSUMPTION FUNCTION
Davidson, Hendry, Srba and Yeo [DHSY] (EJ 1978) consider the steady state theory:
Taking logs of (1) and imposing the parameter restriction
α
=1 yields
ln C = ln K + ln Y
(2)
From now on, for notational convenience, we use upper case letters for the logarithms of variables (unless
otherwise stated). A number of points should be noted.
(1) DHSY use quarterly seasonally unadjusted data in their empirical analysis. Thus, rather than using an ECM
model of the form:
which may be appropriate for adjusted data, DHSY use a form with fourth differences
(2) The dynamics that DHSY find in their specification search is a little more complicated however than is
indicated in (4). For example, DHSY Equation 41 is:
Note in (5) there is no intercept, but there is a term in the acceleration of the level of income. We could rewrite (Y
 C) as (CY) [this will only change the coefficient sign] and then remembering that all variables are measured in
logs, can interpret (CY) as the log of the ratio of the levels of C and Y; that is, as the log of the average
propensity to consume.
(3) DHSY use nondurable consumption expenditure as the variable to be explained, and not total consumers
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This note was uploaded on 03/01/2012 for the course EC 408 taught by Professor Rogerperman during the Fall '07 term at Uni. Strathclyde.
 Fall '07
 RogerPerman

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