The dynamics of aggregate UK consumers' non-durable expenditure

The short-run dynamics and long-run relationship of and between non-durable consumption, non-asset income, wealth and the relative price of durable goods are examined. From the intertemporal budget constraint, non-durable consumption expenditure cointegrates with income and wealth and with the relative price of durables and non-durables. The resulting equilibrium correction need not be through consumption. It is found that much of the adjustment towards the long-run common trend comes from changes in wealth. One possible implication is that the consumption cointegrating residual may predict asset returns, and this is the case. At least 30% of fluctuations in non-human wealth are transitory, decoupled from permanent consumption. (c) 2006 Bank of England. Published by Elsevier B.V. All rights reserved.