Test of the absolute income hypothesis ın USA and Europe

Abstract

In this study, the relationship between consumption and income is investigated from the Absolute Income Hypothesis perspective, by using the Engle and Granger methodology, with an extension to their sample group, including Austria, Belgium, Denmark, Finland, Germany, Italy and UK, as well as USA. The evidences suggest that both consumption and income series for all the countries have unit roots. The results also suggest that while the residuals from the long run relation estimation regression of consumption and income for Austria, Belgium, Finland and Germany have unit roots, the residuals for Denmark, Italy, UK and USA do not have unit roots, suggesting that for the later group of countries, consumption and income series are co-integrated. Lastly, the coefficients derived by estimating the error correction model for Italy, UK and USA are in accordance with the expected signs, suggesting that consumption adjusts in the short run to its long run equilibrium value.