A systems approach to the relationship between consumption and wealth

The single-equation approach to the determination of consumption, due to Hendry and von Ungern-Sternberg (HUS), is extended to a multi-equation system which links decisions on consumption and the components of wealth. The original HUS approach has proved to be a very durable one, being applicable to a number of countries and macroeconomic models. This approach is extended to allow a role for rates of return as well as income, and it is shown how this extension results in an error correction system. The empirical analysis used is based on Johansen's maximum likelihood extension of the co-integration approach of Engle and Granger.