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Thick modelling income and wealth effects: a forecast application to euro area private consumption


This study develops a thick modelling tool for real private consumption, with a conditional forecasting application to the euro area. Several equations from thousands of error correction models, always including labour income, non-labour income, financial wealth and non-financial wealth as determinants, are selected from predetermined in-sample and out-of-sample criteria. Our thick model estimates show that income effects differ between labour and non-labour income and that their (relative) importance varies over time. This implies that labour and non-labour income should both be on the radar of policy makers and modellers.

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  1. An extension to four variables results in selecting from around a quarter of a million of equations. These results are available upon request and do not materially change the results on the basis of three non-income/wealth determinants as reported here.

  2. We thank an anonymous referee for pointing out the possibility of nonlinear effects of consumer confidence as argued in Bruno (2014). In order to allow for nonlinearity, we ran the exercise also including additional equations with a squared measure of uncertainty. Nevertheless, we found that the baseline results reported in this paper do not change in a meaningful way. After applying all the criteria only one additional equation containing a nonlinear term of uncertainty measure is selected compared to the baseline results.

  3. An alternative estimation procedure would be to follow dynamic OLS (DOLS) (Saikkonen 1991; Stock and Watson 1993). GMM has, however, the advantage that the model can be estimated in one step and therefore generating a wide range of estimated short-run coefficients as well as long-run coefficients rather than only one long-run coefficient as is the case for DOLS.


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Correspondence to Gabe Jacob de Bondt.

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We thank two anonymous reviewers for their useful comments. We acknowledge comments received from participants of the 1st Vienna Workshop on Economic Forecasting February 15–16 2018, the 22nd International Conference on Macroeconomic Analysis and International Finance 24–26 May 2018, the January 2018 ECB Working Group of Forecasting Work Programme Meeting, a December 2017 ECB mini-workshop on private consumption, Business Cycle Analysis Division staff as well as from Michele Lenza.



See Table 3.

Table 3 Additional short-run consumption determinants

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de Bondt, G.J., Gieseck, A. & Zekaite, Z. Thick modelling income and wealth effects: a forecast application to euro area private consumption. Empir Econ 58, 257–286 (2020).

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