The consumption-wealth ratio under asymmetric adjustment

• Autor(es): Gabriel, Vasco J. ; Alexandre, Fernando ; Bação, Pedro
• Data: 2007
• Identificador Persistente: http://hdl.handle.net/1822/11697
• Origem: RepositóriUM - Universidade do Minho
• Assunto(s): Consumption; Financial markets; Uncertainty; Forecast; Markov switching
• Tipo de Documento: Research paper
• Idioma: Inglês

Descrição

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.