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The Relationship between Consumption, Income and Wealth in Hong Kong

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  • Joanne Cutler

    (Hong Kong Institute for Monetary Research)

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    Abstract

    This paper sets out to estimate a consumption function for Hong Kong along the lines of the standard Life-Cycle Model formulated by Ando and Modigliani (1963). This is not a straightforward exercise given the lack of official estimates of household sector income and wealth holdings in Hong Kong. The paper reports the results of empirical tests between alternative proxies for aggregate labour income which are derived from official estimates of average pay and employment, and employs a new series developed by the Hong Kong Monetary Authority for private sector housing wealth. We find a stable relationship between consumption, labour income and wealth in Hong Kong with plausible long run estimates of the implied marginal propensity to consume out of income and wealth. In particular, the marginal propensity to consume out of housing wealth is estimated to be lower than in other industrialised economies which is consistent with a relatively uneven distribution of wealth in Hong Kong. Arithmetically, the decline in housing wealth in Hong Kong since 1997 can more than account for the weakness of consumption since then.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 012004.

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    Length: 28 pages
    Date of creation: Jan 2004
    Date of revision:
    Handle: RePEc:hkm:wpaper:012004

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    1. repec:fth:harver:1435 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    5. Philippe BACCHETTA & Stefan GERLACH, 1997. "Consumption and Credit Constraints : International Evidence," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9707, Université de Lausanne, Faculté des HEC, DEEP.
    6. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December.
    7. Carol C. Bertaut, 2002. "Equity prices, household wealth, and consumption growth in foreign industrial countries: wealth effects in the 1990s," International Finance Discussion Papers 724, Board of Governors of the Federal Reserve System (U.S.).
    8. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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    Citations

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    Cited by:
    1. Michael Funke & Michael Paetz & Ernest Pytlarczyk, 2010. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Quantitative Macroeconomics Working Papers 21009, Hamburg University, Department of Economics.
    2. Li-gang Liu & Laurent Pauwels & Andrew Tsang, 2007. "Hong Kong's Consumption Function Revisited," Working Papers 0716, Hong Kong Monetary Authority.
    3. Yu-Fu Chen & Michael Funke & Aaron Mehrotra, 2011. "What Drives Urban Consumption in Mainland China? The Role of Property Price Dynamics," Working Papers 152011, Hong Kong Institute for Monetary Research.
    4. Victor Chernozhukov & Roberto Rigobon & Thomas Stoker, 2009. "Set identification with Tobin regressors," CeMMAP working papers CWP12/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. Li-gang Liu & Laurent Pauwels & Andrew Tsang, 2007. "How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption," Working Papers 0720, Hong Kong Monetary Authority.

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