3 dhsy use non durable consumption expenditure as the

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(3) DHSY use non-durable consumption expenditure as the variable to be explained, and not total consumers expenditure. Economic theory considerations suggest that the determinants of durable consumers expenditure may include variables different from those determining non-durables. If so, then as with DHSY, there is a strong case for modelling these two components via separate equations. Nevertheless, you will see that, for our data sets, non-durable expenditure does not appear to be "cointegrated with" income alone (or with income and wealth). However, total consumers expenditure is found to be cointegrated with income and wealth. (4) DHSY did not include wealth as a determinant of (non-durable) consumers' expenditure. However, it is possible to argue that wealth is implicitly incorporated in the ECM-type equation they estimate by noting the following. Define wealth at time period t to be A t , where A is the real value of assets. Then the consumer's budget constraint is DHSY (equation 8) describe a steady state form of Modligiani's life cycle hypothesis as where r is the rate of return on assets (or wealth). Differencing this yields KY = C α (1) ) C - (Y a + Y a + a = C 1 - t 2 t 1 1 0 t 1 (3) ) C - (Y a + Y a + a = C 4 - t 2 t 4 1 0 t 4 (4) dummies + ) C - (Y a + Y a + Y a = C 4 - t 3 t 4 1 2 t 4 1 t 4
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