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Non-linear consumption dynamics


Abstract: Taking explicitly into account the forward-looking nature of consumption, this paper derives a non-linear equation for consumption growth in which the coefficient of contemporaneous expected income growth is an increasing (decreasing) function of lagged variables positively (negatively) correlated with future income growth. Estimating it with aggregate data, the paper finds statistically and economically significant non-linear consumption dynamics for three major industrial countries. These dynamics imply, among other things, that monetary policy may have a more immediate and profound effect on consumption, and through it on real economic activity, than commonly thought.

Keywords: Econometric models; Consumption (Economics); Monetary policy;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Research Paper

Publication Date: 1997

Number: 9726