Response of Consumption to Income, Credit and Interest Rate Changes in Australia
AbstractThis paper examines the response of consumption to income, credit and interest rate changes in Australia. In contrast to previous studies on consumption in Australian, this paper adopts an Euler equation approach. The Euler equation derives from the consumers' utility maximising problem under the assumption that rule of thumb consumers have borrowing restrictions. To assess the role of credit explicitly, credit variables are also included in the Euler equation. The paper further assumes that coe±cients are time-varying. The results con¯rm the signi¯cant e®ects of income and credit on consumption and also reveal that while consumption growth is not responsive to interest rate changes, the coe±cient on the real interest rate was time varying and the coe±cient becomes smaller in absolute terms since the mid 1990s. This implies that consumption may have been less responsive to interest rate changes since then.
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Bibliographic InfoPaper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2005n20.
Length: 24 pages
Date of creation: Dec 2005
Date of revision:
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