Consumption, co-integration and varying coefficients: the Australian evidence

Abstract

An aggregate consumption function incorporating random coefficient approach is estimated to investigate the changing pattern of consumer response in Austrialia using quarterly data from 1959: IV to 1990: IV. The methdology applied is that of Hidreth and Houck (1968), Singh et al. (1976) and Hoque (1991). The largenge multiplier test, as suggested by Breush and Pagan (1979), supports the hypothesis of randomness in the response coefficients. Our Study indicates strong dependence on the first-difference of income and that consumers respond quite slowly to short-run fluctuations. This is because consumption and income have been found to be integrated of order one and co-integrated. Thus, as error correction model has been estimated following Engle and Granger (1987).