Consumption function estimate and consumption forecast

This paper studies impacts of disposable income and financial wealth on aggregate household consumption. The considered time period ranges from 1996 to 2005. Results confirm that not only disposable income but also wealth has significant impact on consumption. Moreover, we show that the most appropriate proxy for wealth is the sum of monetary aggregate M2 and assets invested in mutual funds. We also investigate the effects of interest rates and further relevant variables. It turns out these variables are not significant in the consumption function. The second main objective of this work is to evaluate different consumption forecasting approaches. We show that the most accurate in sample and out of sample forecasts originate from a vector error correction model with exogenous variables.