School of Economics and Finance

No. 448: Deconstructing the Consumption Function: New Tools and Old Problems

Stephen Pollock , Queen Mary, University of London
Nikoletta Lekka , Queen Mary, University of London

December 1, 2001

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In this paper, we analyse anew the relationship between aggregate income and consumption in the United Kingdom. Our analysis entails a close examination of the structure of the data, for which we employ a variety of spectral methods which depend on the concepts of Fourier analysis. We discover that fluctuations in the rate of growth of consumption tend to precede similar fluctuations in income, which contradicts a common supposition. We also highlight the difficulty of uncovering from the aggregate data a structural equation representing the behaviour of consumers.

J.E.L classification codes: C22

Keywords:Consumption function, Trend estimation, Seasonal adjustment, Spectral analysis