An aggregate consumption function for Canada: a co-integration approach

Author(s): Craigwell, Roland C; Rock, Llewyn L (1993)

Created 22 Jul, 1993
Categories Working Papers
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This study utilises cointegration theory and error correction models (ECMs) to specify a candidate dynamic formulation of the aggregate consumption function using quarterly Canadian data. Following Engle and Granger (1987), the variables entering the long-run equilibrium relationship are tested for unit roots using a variety of techniques such as the Dickey-Fuller, the Augmented Dickey-Fuller and the Phillips-Perron test procedures. Johansen's maximum likelihood approach is also used to determine the rank of the conditional characterisation of the data generating processes, reveals that disposable income, wealth, government expenditures, relative prices and liquidity constraints (proxied by the unemployment rate) are important variables. Non-nested tests are carried out against a recent dynamic specification in Sawyer (1992). Encompassing tests show that our model can encompass the Sawyer model.

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