UK Consumption in the long run: the determinants of consumer spending 1925-1995

Study of long runs of economic data makes it possible to distinguish between unit root processes and deterministic, but broken trends. We find that most of the variables to be used in a consumption function have deterministic trends. We estimate a modified life-cycle model over the period 19251995, finding satisfactory and stable model parameters together with long-run residuals from which we can exclude broken trends, indicating that we have found a co-trending and co-breaking relationship. By contrast, the long-run residuals from a model which explains consumption in terms of income and inflation exhibit a broken trend.