Consumption-Wealth Ratio and Housing Prices
AbstractThis paper shows, from the consumer budget constraint, that the consumption spending and the different components of total wealth, i.e. financial, housing and human wealths, are cointegrated and that deviations from the common trend cahy is a proxy for the consumption-wealth ratio that should predict expected returns on financial assets and housing. Using U.S post-war data, we provide empirical evidence in favor of the existence of a cointegration relationship with a structural break in the mid-eighties. Moreover, we show that until the beginning of 2000, consumption spending and housing wealth were dominated by permanent shocks. The main variable that adjusts to restore the long-run trend when a deviation occurs is the financial wealth and therefore it presents the main transitory variations in total wealth. However, over the last period 2000-2009, most of transitory shocks in total wealth are associated to fluctuations in the housing component of wealth rather than financial wealth. Besides, we found that a small fraction of transitory changes in wealth is associated with movements in consumption. These conclusions are in line with our empirical results on the ability of the cahy to predict expected asset and housing returns. Indeed, until the beginning of 2000, the proxy of the consumption-wealth ratio predicts expected asset returns and fails to explain future fluctuations in housing returns.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 264.
Length: 51 pages
Date of creation: 2009
Date of revision:
Consumption-wealth ratio ; Structural break ; Cointegration ; Cointegrated VAR ; Trends and cycles ; Housing returns ; Asset prices ; Long-run predictability.;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996.
"Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration,"
96a09, Universite Aix-Marseille III.
- MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
- James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers 1996_07, York University, Department of Economics.
- Jeremy Rudd & Karl Whelan, 2006. "Empirical Proxies for the Consumption-Wealth Ratio," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 34-51, January.
- Steven Cook, 2004. "Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship," Applied Economics Letters, Taylor & Francis Journals, vol. 11(14), pages 879-884.
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