Consumption, income and cointegration

Hsiang Ling Han, Masao Ogaki

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11 Citations (Scopus)

Abstract

This paper examines the long-run relationship of consumption and income in the United States. It was shown by King et al. (1991) in a version of the permanent income hypothesis that log levels of consumption and income are cointegrated with a known cointegrating vector (1,-1)′. This implies a restriction that the cointegrating vector, which eliminates the stochastic trends, also eliminates the deterministic trends arising from the drift terms of difference stationary variables. Two different methodologies are used to test this deterministic cointegration restriction in this study. The first methodology is the canonical cointegrating regression proposed by Park (1992). The second methodology is testing stationarity of the difference of log consumption and log income, by assuming the cointegrating vector to be (1,-1)′. Two test statistics for the null hypothesis of stationarity are employed. One is the G(p,q) test proposed by Park and Choi (1988) and the other is proposed by Kwiatkowski et al. (1992). The results of the study indicate that the deterministic cointegration restriction cannot be rejected. JEL: E21, C32

Original languageEnglish
Pages (from-to)107-117
Number of pages11
JournalInternational Review of Economics and Finance
Volume6
Issue number2
Publication statusPublished - 1997
Externally publishedYes

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ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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