Chapter

Econometric Modelling of the Aggregate Time‐Series Relationship Between Consumers' Expenditure and Income in the United Kingdom

David F. Hendry, J. E. H. Davidson, F. Srba and S. Yeo

in Econometrics: Alchemy or Science?

Published in print October 2000 | ISBN: 9780198293545
Published online November 2003 | e-ISBN: 9780191596391 | DOI: http://dx.doi.org/10.1093/0198293542.003.0009
 Econometric Modelling of the Aggregate Time‐Series Relationship Between Consumers' Expenditure and Income in the United Kingdom

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Simple time‐series representations dominated quarterly permanent‐income/life‐cycle models of consumption in fit and predictive accuracy. However, an ‘error‐correction’model (ECM, using the log consumption/income ratio) reconciled both the theories and the evidence, and treated as the DGP, explained the connection between the time‐series and econometric equations. Moreover, the ECM class was shown to have good properties in a pilot Monte Carlo study. While substantively focussed on modelling aggregate consumers’ expenditure, key methodological issues are addressed, including modelling strategies, parameter constancy, collinearity, seasonality, and encompassing (the explanation of other models’ results). Augmented by inflation, a constant model was developed (since known as DHSY), which predicted the first half of the 1970s.

Keywords: conditional modelling; consumer expenditure; DHSY; differencing; error‐correction model; inflation; measurement errors; multicollinearity; orthogonalization; seasonal adjustment

Chapter.  19393 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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