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Why net worth is the wrong concept for explaining consumption: evidence from Italy

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Listed:
  • Muellbauer, John
  • De Bonis, Riccardo
  • Liberati, Danilo
  • Rondinelli, Concetta

Abstract

Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the 'representative household' owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.

Suggested Citation

  • Muellbauer, John & De Bonis, Riccardo & Liberati, Danilo & Rondinelli, Concetta, 2023. "Why net worth is the wrong concept for explaining consumption: evidence from Italy," INET Oxford Working Papers 2023-27, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    • Handle: RePEc:amz:wpaper:2023-27
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    More about this item

    Keywords

    financial wealth; liquid and illiquid assets; permanent income; housing wealth;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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