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Debt dynamics and excess sensitivity of consumption to transitory wealth changes

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We analyse the consumption-wealth relationship using a framework that accounts for transitory variation in wealth, and in a setting where transitory variation in household net worth is not dominated by boom and bust cycles in stock markets. We find that transitory variation in consumption depends positively on recent transitory changes in wealth. In addition, we find that gross asset wealth and household debt are positively related. Both findings constitute departures from standard lifecycle/ permanent income hypothesis theory with complete financial markets, but can be explained by the introduction of liquidity constraints.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2010/dp10_09.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/09.

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Length: 43 p.
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:nzb:nzbdps:2010/09

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  1. François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers, University of Wisconsin Center for Urban Land Economic Research 02-01, University of Wisconsin Center for Urban Land Economic Research.
  2. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003, Royal Economic Society 7, Royal Economic Society.
  3. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
  4. Kalin Nikolov & Alex Michaelides & Nobuhiro Kiyotaki, 2007. "From Shirtsleeves to Shirtsleeves in a Long Lifetime," 2007 Meeting Papers, Society for Economic Dynamics 357, Society for Economic Dynamics.
  5. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series 2007/10, Center for Financial Studies (CFS).
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Cited by:
  1. Daan Steenkamp, 2010. "New Zealand’s imbalances in a cross-country context," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 37-49, December.
  2. Emmanuel De Veirman & Ashley Dunstan, 2011. "Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption," CAMA Working Papers 2011-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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