Abstract.
In this paper we show how the potential misspecification of the consumption function can be ameliorated by approximating any unmodelled long run variation with an unobserved component in the form of a time-varying trend. This methodology is applied to Greek, Portuguese and Spanish consumption functions during the post-second World war period. The empirical evidence suggests that there are many determinants of long-run consumption in these countries, in addition to income and inflation, and these unobserved long-run effects are captured by a nonstationary stochastic component. The long-run elasticity of consumption with regards to the unobserved component is greater than unity in all countries.
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First version received: January 1999/Final version received: June 2000
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Sarantis, N., Stewart, C. Unobserved components in an error-correction model of consumption for Southern European countries. Empirical Economics 26, 391–405 (2001). https://doi.org/10.1007/s001810000047
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DOI: https://doi.org/10.1007/s001810000047