The Consumption Euler Equation or the Keynesian Consumption Function?*

Abstract

We formulate a general cointegrated vector autoregressive (CVAR) model that nests both a class of consumption Euler equations and various Keynesian‐type consumption functions. Using likelihood‐based methods and Norwegian data, we find support for cointegration between consumption, income and wealth once a structural break around the time of the financial crisis is allowed for. The fact that consumption cointegrates with both income and wealth and not only with income points to the empirical irrelevance of an Euler equation. Moreover, we find that consumption equilibrium corrects to changes in income and wealth, but not that income equilibrium corrects to changes in consumption, which would follow from an Euler equation. We also find that most of the parameters stemming from the class of Euler equations are not corroborated by the data when conditional expectations of future consumption and income in CVAR models are considered. Only habit formation seems important in explaining Norwegian consumer behaviour. Our estimated conditional Keynesian‐type consumption function implies a first year marginal propensity to consume (MPC) out of income of close to 40%.

Determinants Of The VAT Gap In The European Union: An Empirical Evidence with Corruption Control As A Moderating Variable

“…Moreover, economic growth (through investment) also refers to the improvement of the economy for society due to the creation of new job opportunities and increased income (Latif et al, 2018). Directly, this will increase consumption (purchasing power) among the public, as per the consumption theory introduced by Keynes (Alp & Seven, 2019;Boug et al, 2021). The increase in final consumption will also increase taxes on the consumption of goods and services, which is part of VAT (Akhmadeev et al, 2017;Dahri et al, 2019).…”

Analyzing the Underlying Relationship Between Monetary Policy and Residential Property Prices in China

“…There is still a clear A statistical method for assigning the variance of an endogenous variable is variance decomposition. To determine the effect of structural components on variable fluctuations and to evaluate the impact of several factors as described in the scholarly literature (Bolt et al, 2019;Boug et al, 2021). Thus, variance decomposition, as shown in Table 5 helps explain real estate price index variables.…”

Analysis of Household Debt Level in the Framework of Behavioral Macroeconomics

“…Denklemde 𝑑 𝑡 = (𝑟 𝑡−1 ). (𝑑 𝑡−1 ) ifade etmektedir (Albuquerque & Krustev, 2015;Flodén et al, 2020;Boug et al, 2021).…”