Empirical analysis reveals shifts in consumer sensitivity toward wealth and interest rates across seven industrial countries, indicating that traditional models risk misleading forecasts.
We estimate the impact of financial liberalisation on consumption in seven major industrial countries, and find a marked shift in behaviour, notably a decline in short‐run income elasticities and a rise in short‐run wealth and interest rate elasticities. A corollary is that consumption equations estimated over both pre‐ and post‐liberalisation regimes may be misleading, and either a form of testing as presented here or a shortening of the sample period may be appropriate for accurate forecasting and simulation.
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Barrell et al. (2007) studied this question.
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