Using a VECM to characterize the relative importance of permanent and transitory components of US total disposable income and total consumption

This paper uses a VECM to charcaterize the transitory component in US total disposable income and total consumption. The results indicate that almost all the variance of consumption change is explained by the trend, while the variance of the cyclical component accounts for an estimated 64% of the total variance of income change; consumption is the trend in income but is not a random walk; furthermore there is excess of sensitivity and excess smoothness in consumption. The interpretation of these results cannot be performed in terms of traditional permanent income model.