Abstract:

In this study the relationship between consumption and income is investigated from the Absolute Income Hypothesis perspective by using the Engle and Granger methodology with an extension to their sample group including Austria Belgium Denmark Finland Germany Italy and UK as well as USA The evidences suggest that both consumption and income series for all the countries have unit roots The results also suggest that while the residuals from the long run relation estimation regression of consumption and income for Austria Belgium Finland and Germany have unit roots the residuals for Denmark Italy UK and USA do not have unit roots suggesting that for the later group of countries consumption and income series are co integrated Lastly the coefficients derived by estimating the error correction model for Italy UK and USA are in accordance with the expected signs suggesting that consumption adjusts in the short run to its long run equilibrium value Key Words: Consumption Income Absolute Income Hypothesis Cointegration

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