Description

We estimate a cointegrated VAR of consumption, household money and their determinants in Chile. We find two long-run relations that can be specified as a classic money-demand equation and a consumption equation that is homogenous in disposable income. We find that the household money overhang has indeed a significant effect on future consumption, while consumption deviations do not affect money holdings. The dynamic properties of the system, namely Granger causality and the weak exogeneity criteria developed in Urbain (1992), allow the estimation of a marginal system for consumption and money as well as conditional forecasts on exogenous paths of income, interest rates, and inflation. Our system tracks the in-sample dynamics of consumption well, and better than other consumption equations estimated in Chile without money in the past. And out of sample tests show that our model has better forecast performance than univariate models, or systems without money. However, this does not hold for longer horizons.