By P. Arestis, George Hadjimatheou
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Additional resources for Introducing Macroeconomic Modelling: An Econometric Study of the United Kingdom
Example text
A data problem which comes under this heading is seasonal variation. Until very recently the practice has been either to use seasonal dummy variables as additional regressors or to run regressions using seasonally adjusted data. We now know, however, that these approaches have serious shortcomings. The use of dummy variables is tantamount to imposing an apriori and ad hoc seasona1 pattern which is extraneous to the rest of the relationship. e. an extra variation of the variables caused by the seasonal adjustment procedure that distorts some aspects of the original series unrelated to seasonality (Wallis, 1974; Prothero and Wallis, 1976).
AGGREGATE PROPENSITY TO CONSUME We define the aggregate propensity to consume (APC) as the ratio of total consumers' expenditure to total personal disposable income, 3 which is equivalent to the average propensity to consume for the economy as a whole. This ratio has been declining since 1950, when it stood at 99 per cent, reaching a little over 85 per cent in 1978. The downward trend which was in full swing in the 1950s and in relative abeyance in the 1960s accelerated rapidly in the per iod 1972-3.
In other words, consumption, being proportional to permanent income, is the best proxy we can have for the latter. It is therefore suggested that the simple autoregressive scheme Ct = bCt_l + Ut is sufficient and that 'under the pure life cycle-permanent 1ncome hypothesis a forecast of future consumption obtained by extrapolation of today's level by the historical trend is impossible to improve' (Hall, 1978, p. 986). This is certainly a very bold claim which, however, has already been shown to be contradicted by an analysis of the UK data (Daly and Hadjimatheou, 1981).
