NONLINEARITY, CYCLICITY, AND PERSISTENCE IN CONSUMPTION AND INCOME RELATIONSHIPS: RESEARCH IN HONOR OF MELVIN J. HINICH

Abstract

This paper is dedicated to the memory of the great statistician Melvin J. Hinich, with whom we were in contact about this research prior to his untimely death from a tragic fall. We develop a neoclassical growth model with habit formation to exhibit an equilibrium nonlinear relationship between aggregate consumption growth and income growth. We first provide empirical evidence consistent with this relationship both for the United States and France, and we reject the hypothesis of a random walk for consumption. We then estimate this nonlinear relationship. We find for both countries robust evidence of persistence, nonlinearity, and cyclicity in the relationship between consumption and income.