Ref2 - File C\Winword\Econmet\Ref2.DOC SOME THEORETICAL WORK ON THE CONSUMPTION FUNCTION Davidson Hendry Srba and Yeo[DHSY(EJ 1978 consider the

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File: C:\Winword\Econmet\Ref2.DOC 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 (C-Y) [this will only change the coefficient sign] and then remembering that all variables are measured in logs, can interpret (C-Y) 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 non-durable 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.

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Ref2 - File C\Winword\Econmet\Ref2.DOC SOME THEORETICAL WORK ON THE CONSUMPTION FUNCTION Davidson Hendry Srba and Yeo[DHSY(EJ 1978 consider the

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