VECM and Variance Decomposition: An Application to the Consumption-Wealth Ratio

This study uses a variance decomposition technique, which doesn’t rely on the underlying economic theory, in order to implement a permanent-transitory variance decomposition of the consumption-wealth ratio. We break down the wealth variable into financial assets, tangible assets, and human assets. Using quarterly data over the last six decades, we rely on cointegration analysis as the framework for the study, in order to assess the long-term interrelation between consumption shocks, and those from each of the above mentioned wealth components. Our results indicate that wealth components tend to exhibit permanent shocks, while consumption shocks appear to be transitory. Moreover, the results also indicate a low contemporaneous correlation between shocks in consumption and the ones from financial assets, and also between shocks in consumption and the ones from tangible assets. In addition, the variance decomposition of consumption shocks seems to indicate that, over the time a significantly increasing proportion of consumption shocks is explained by financial assets.

Has the Instability of Personal Incomes been Increasing?

This paper examines trends in the instability of personal incomes in Britain in terms of changes in the transitory variance and in volatility, measures that have received much recent attention in research about the USA. It is shown that, although US measures have trended upwards over the past two decades, there is no such trend in Britain between the early-1990s and the mid-2000s. Explanations for these differences are discussed.