Demographic Structure, Asset Holdings and the Explanation of Aggregate Consumers′ Expenditure

Recent work on the econometric specification of the consumption function by London Business School (LBS) forecasters has argued that the inclusion of a variable capturing movements in demographic structure is essential to the explanation of the recent sharp drop in the UK personal savings ratio. It is shown that the inclusion of demographic factors does not provide a model that is robust to alternative data formulations. On the contrary, an adequate explanation for recent movements in aggregate consumers′ expenditure can be found using the LBS data by specifying a consumption function that incorporates adjustment of income to control for the maintenance of the real value of asset holdings, following Hendry and Von Ungern‐Sternberg (1981).