Skip to main content

Reinterpreting the DHSY (1978) consumption function with hindsight

Buy Article:

$55.00 plus tax (Refund Policy)

Abstract:

The justification for Davidson, Hendry, Srba and Yeo's (DHSY's) selection of their favoured equation is shown to be based upon contradicting assumptions about inflation. The empirically supported model is argued not to have a theoretically justified error-correction interpretation. The exclusion of the intercept biases the error-correction term such that it becomes significant and negative but undermines the theoretical plausibility of the long-run target. More generally, the statistical need to include an intercept in any regression to avoid parameter bias is demonstrated. The rise in inflation in the 1970s is not considered to be a credible explanation of the fall in the average propensity to consume (APC) from the 1950s and is shown to have questionable empirical support when a below unit income-elasticity is allowed for. The recent articles which have found support for DHSY's favoured formulation, augmented by time-varying parameters, using the most contemporary UK data should be viewed with caution. New interpretations for the DHSY model's persistent success are called for if it is not to be considered that dubious regressions have been resurrected.

Document Type: Research Article

DOI: https://doi.org/10.1080/000368498325741

Publication date: 1998-04-01

More about this publication?
  • Access Key
  • Free ContentFree content
  • Partial Free ContentPartial Free content
  • New ContentNew content
  • Open Access ContentOpen access content
  • Partial Open Access ContentPartial Open access content
  • Subscribed ContentSubscribed content
  • Partial Subscribed ContentPartial Subscribed content
  • Free Trial ContentFree trial content
Cookie Policy
X
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more