Modeling the French Consumption Function Using SETAR Models

We provide new estimations on aggregate consumption series in France using the framework of non-stationary threshold models. Most macroeconomists agree with the idea that, since the beginning of the seventies, the saving ratio has evolved irregularly. Such irregularities are usually interpreted as being caused by mispecification problems or measurement errors. We suggest another explanation that strengthens the role played by structural breaks caused by endogenous factors such as habit formation. In this view, we use threshold models (SETAR) to study both the dynamics of short and long term in order to account for the existence of asymmetric effects in the relationship between consumption and some of its determinants. The estimations and forecasts obtained show that the SETAR error correction model leads to better performance than other specifications such as the usual linear error correction model, the quadratic error correction model and the cubic error correction model.