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The consumption-wealth ratio under asymmetric adjustment

Gabriel, VJ, Alexandre, F and Ba ão, P (2008) The consumption-wealth ratio under asymmetric adjustment Studies in Nonlinear Dynamics and Econometrics, 12 (4). ISSN 1558-3708

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Abstract

This paper argues that nonlinear adjustment may provide a better explanation of °uctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to di®er across regimes. Estimation of the system suggests that these states are related to the behaviour of ¯nancial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the ¯rst when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of a simple model of consumption under uncertainty.

Item Type: Article
Additional Information: © Walter deGruyter 2011.Published in Studies in Nonlinear Dynamics and Econometrics, 12 (4) 2008 DOI 10.2202/1558-3708.1565
Divisions: Faculty of Business, Economics and Law > Economics
Depositing User: Symplectic Elements
Date Deposited: 16 Jul 2012 09:11
Last Modified: 23 Sep 2013 19:23
URI: http://epubs.surrey.ac.uk/id/eprint/436678

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