An Econometric Study of Private Consumption Expenditure in Sweden

Abstract

A Consumption function based on the life-cycle hypothesis is estimated using Swedish anuual data for the period 1970-1998. Hendry`s general to specific approach is applied using an error correction model in order to arrive at the preferred equation. In order to confirm the estimated cointegrating relationship, the Johansen procedure is employed. The preferred equation displays a good fit over the sample period and diagnostic tests indicate that the parameters are robust over time. The long run properties and the dynamic response to shocks in the exogenous variable are evaluated using a system of simultaneous equations containing the preferred eauation and a disaggregated form of the savings identity. Results from the simulations are in accordance with intuition and consistent with the life-cycle hypothesis.

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