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Modelling New Zealand Consumption Expenditure over the 1990s

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  • Khoon Lek Goh
  • Richard Downing

    ()
    (The Treasury)

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    Abstract

    This paper presents two models of consumption for the primary purpose of forecasting consumption expenditure growth in New Zealand. The models, which are consistent with a range of consumption functions including the life-cycle and permanent income hypothesis, are error correction models with the long-run equations estimated using both the conventional ordinary least squares procedure as well as the Stock and Watson procedure of leads and lags. Unlike earlier New Zealand studies, actual data on household net wealth, rather than proxies or derived series were used. This allowed the wealth variable to modelled in disaggregated form. Mortgage equity withdrawal by households and funds brought into the economy by immigrants are two novel variables included in the consumption models. Migrant transfers were found to have an influence on short-run consumption growth, but not mortgage equity withdrawal although the latter did contribute to a higher overall model fit. Net non-financial wealth was found to have short-run influence on consumption but not in the long-run.

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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2002/02-19/twp02-19.pdf
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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 02/19.

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    Length: 28 pages
    Date of creation: Sep 2002
    Date of revision:
    Handle: RePEc:nzt:nztwps:02/19

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    Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
    Phone: +64-4-472 2733
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    Web page: http://www.treasury.govt.nz
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    Related research

    Keywords: Forecasting; consumption functions; wealth; migrant transfers; mortgage equity withdrawal;

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    References

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    1. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    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, Royal Economic Society, vol. 88(352), pages 661-92, December.
    3. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1397-1408, December.
    4. Church, Keith B & Smith, Peter N & Wallis, Kenneth F, 1994. "Econometric Evaluation of Consumers' Expenditure Equations," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 10(2), pages 71-85, Summer.
    5. Laurence Boone & Nathalie Girouard & Isabelle Wanner, 2001. "Financial Market Liberalisation, Wealth and Consumption," OECD Economics Department Working Papers, OECD Publishing 308, OECD Publishing.
    6. Daron Acemoglu & Andrew Scott, 1993. "Consumer Confidence and Rational Expectations: Are Agents Beliefs Consistent with the Theory?," CEP Discussion Papers, Centre for Economic Performance, LSE dp0119, Centre for Economic Performance, LSE.
    7. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers, OECD Publishing 208, OECD Publishing.
    8. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    9. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-09, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. 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.

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