Advanced Search
MyIDEAS: Login

How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption

Contents:

Author Info

  • Li-gang Liu

    (Research Department, Hong Kong Monetary Authority)

  • Laurent Pauwels

    (Research Department, Hong Kong Monetary Authority)

  • Andrew Tsang

    (Research Department, Hong Kong Monetary Authority)

Abstract

This paper first investigates whether there is a cointegration relationship between Hong Kong¡¦s consumption and wealth using the latest cointegration tests that allow for structural breaks. Our tests show there is only limited empirical support for the existence of a cointegration relationship between consumption and wealth (including both housing and financial wealth). These test results thus cast doubt on the validity of the estimates based on the cointegration result. We then estimate a structural equation linking consumption and wealth derived from a habit formation consumption model. Our estimates show that the short run and the long run marginal propensities to consume out of a one Hong Kong dollar increase in total wealth are about 0.14 and 0.6 cents, respectively. These values are much smaller than those previously estimated using the cointegration approach. The housing wealth effect in Hong Kong is also relatively small compared to estimates for the United States obtained using a similar habit formation specification.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_20_full.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0720.

as in new window
Length: 29 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:hkg:wpaper:0720

Contact details of provider:
Postal: 55th Floor, Two International Finance Centre, 8 Finance Street, Central
Phone: (852)28788261
Fax: (852)28781892
Email:
Web page: http://www.info.gov.hk/hkma/
More information through EDIRC

Related research

Keywords: Cointegration test with structural breaks; habit formation model; wealth effect; Hong Kong;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Dor, E & Thurston, T & Weiserbs, D, 1987. "On Testing the Permanent Income Hypothesis and Rational Expectations," Empirical Economics, Springer, vol. 12(3), pages 137-56.
  2. Martin Browning & Thomas F. Crossley, 2000. "The Life Cycle Model of Consumption and Saving," Social and Economic Dimensions of an Aging Population Research Papers 28, McMaster University.
  3. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," Economics Working Paper Archive 535, The Johns Hopkins University,Department of Economics.
  4. Lee, Junsoo & Strazicich, Mark C, 2001. " Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 535-58, December.
  5. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
  6. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  7. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
  8. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche 9422, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  9. Joanne Cutler, 2004. "The Relationship between Consumption, Income and Wealth in Hong Kong," Working Papers 012004, Hong Kong Institute for Monetary Research.
  10. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  11. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  12. Nunes, Luis C & Newbold, Paul & Kuan, Chung-Ming, 1997. "Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 435-48, November.
  13. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  14. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  15. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  16. repec:fth:harver:1435 is not listed on IDEAS
  17. Tsao, Che S, 1975. "The Linearity Property in the Consumption Function: Estimation, Tests and Some Related Results," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 214-20, May.
  18. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  19. Christopher D. Carroll & Johns Hopkins University, 2006. "Sticky Expectations and Consumption Dynamics," Computing in Economics and Finance 2006 21, Society for Computational Economics.
  20. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  21. Joanne Cutler, 2004. "The Relationship between Consumption, Income and Wealth in Hong Kong," Macroeconomics 0403013, EconWPA.
  22. Dubravko Mihaljek & John Dodsworth, 1997. "Hong Kong, China: Growth, Structural Change, and Economic Stability During the Transition," IMF Occasional Papers 152, International Monetary Fund.
  23. Drobny, A & Hall, S G, 1989. "An Investigation of the Long-run Properties of Aggregate Non-durable Consumers' Expenditure in the United Kingdom," Economic Journal, Royal Economic Society, vol. 99(396), pages 454-60, June.
  24. Martin Sommer & Christopher Carroll, 2004. "Epidemiological expectations and consumption dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 92, Money Macro and Finance Research Group.
  25. Liu, Philip, 2010. "Stabilization bias for a small open economy: The case of New Zealand," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 921-935, September.
  26. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-87, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Funke, Michael & Paetz, Michael & Pytlarczyk, Ernest, 2011. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Economic Modelling, Elsevier, vol. 28(1), pages 316-334.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hkg:wpaper:0720

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Chan).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.