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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 17 de 2005

  

On the Stability of the Wealth Effect


Fernando Alexandre
Departamento de Economia/NIPE, Universidade do Minho

Pedro Bação
GEMF/Faculdade de Economia, Universidade de Coimbra

Vasco J. Gabriel
University of Surrey (UK) and NIPE, Universidade do Minho

Abstract:
Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.

Keywords: Parameter instability; Markov switching; Consumption; Wealth effect.

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