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The Effects of Financial and Real Wealth on Consumption: New Evidence from OECD Countries

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  • Riccardo De Bonis

    ()
    (Banca d'Italia, Economics and International Relations Area)

  • Andrea Silvestrini

    ()
    (Banca d'Italia, Economics and International Relations Area)

Abstract

In this paper we present new estimates of the effect of household financial and real wealth on consumption. The analysis refers to eleven OECD countries and takes into account the years from 1997 to 2008. Unlike most of the previous literature, we exploit European quarterly harmonized data on household financial assets and liabilities, which have been taken from the flow of funds. We measure not only the effect of total financial wealth on consumption, but we also consider the impact of a subset of those financial assets (i.e., quoted shares, mutual funds, insurance technical reserves) that are more linked to the Stock Exchange. Furthermore, we implement a recent econometric approach that allows for more flexible assumptions in the non-stationary panel framework under consideration. Our main results show that both net financial and real wealth have a positive effect on consumption. Overall, the influence of net financial assets is stronger than that of real assets. Using quoted shares, mutual funds and insurance technical reserves as a measure of financial wealth, we obtain a lower estimate of the marginal propensity to consume, possibly due to the strong concentration of equity instruments in the richest households.

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Bibliographic Info

Paper provided by Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences in its series Mo.Fi.R. Working Papers with number 38.

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Length: 29
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:anc:wmofir:38

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Keywords: Cointegration; Household financial and real wealth; Wealth effect;

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References

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  1. Kam-Ki Tang, 2006. "The wealth effect of housing on aggregate consumption," Applied Economics Letters, Taylor & Francis Journals, vol. 13(3), pages 189-193.
  2. Lise Pichette & Dominique Tremblay, 2003. "Are Wealth Effects Important for Canada?," Working Papers 03-30, Bank of Canada.
  3. Karl E. Case, John M. Quigley, Robert J. Shiller., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Economics Working Papers E01-308, University of California at Berkeley.
  4. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  5. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  6. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  7. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2008. "Consumption, wealth and business cycles in Germany," Empirical Economics, Springer, vol. 34(3), pages 451-476, June.
  8. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  9. Vincent Labhard & Gabriel Sterne & Chris Young, 2005. "Wealth and consumption: an assessment of the international evidence," Bank of England working papers 275, Bank of England.
  10. Fátima Cardoso & Luisa Farinha & Rita Lameira, 2008. "Household Wealth in Portugal: Revised Series," Working Papers o200801, Banco de Portugal, Economics and Research Department.
  11. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  12. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  13. Christian Dreger & Hans-Eggert Reimers, 2006. "Consumption and disposable income in the EU countries: the role of wealth effects," Empirica, Springer, vol. 33(4), pages 245-254, September.
  14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  15. Kaddour Hadri & Rolf Larsson, 2005. "Testing for stationarity in heterogeneous panel data where the time dimension is finite," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 55-69, 03.
  16. Christian Dreger & Hans-Eggert Reimers, 2009. "The Role of Asset Markets for Private Consumption: Evidence from Paneleconometric Models," Discussion Papers of DIW Berlin 872, DIW Berlin, German Institute for Economic Research.
  17. Joseph P. Byrne & E. Philip Davis, 2003. "Disaggregate Wealth and Aggregate Consumption: an Investigation of Empirical Relationships for the G7," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(2), pages 197-220, 05.
  18. Filippo Altissimo & Evaggelia Georgiou & Teresa Sastre & Maria Teresa Valderrama & Gabriel Sterne & Marc Stocker & Mark Weth & Karl Whelan & Alpo Willman, 2005. "Wealth and asset price effects on economic activity," Occasional Paper Series 29, European Central Bank.
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Cited by:
  1. Daniel Cooper & Karen Dynan, 2013. "Wealth shocks and macroeconomic dynamics," Public Policy Discussion Paper 13-4, Federal Reserve Bank of Boston.
  2. Riccardo De Bonis & Daniele Fano & Teresa Sbano, 2013. "Household aggregate wealth in the main OECD countries from 1980 to 2011: what do the data tell us?," Questioni di Economia e Finanza (Occasional Papers) 160, Bank of Italy, Economic Research and International Relations Area.
  3. Alessio Ciarlone, 2012. "Wealth effects in emerging economies," Temi di discussione (Economic working papers) 843, Bank of Italy, Economic Research and International Relations Area.
  4. Antonio Bassanetti & Concetta Rondinelli, 2013. "Italian households’ opinions on the difficulty of saving," Questioni di Economia e Finanza (Occasional Papers) 147, Bank of Italy, Economic Research and International Relations Area.
  5. Cristini, Annalisa & Sevilla, Almudena, 2013. "Do House Prices Affect Consumption? A Re-assessment of the Wealth Hypothesis," IZA Discussion Papers 7576, Institute for the Study of Labor (IZA).

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