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Wealth, Credit Conditions and Consumption: Evidence from South Africa

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  • Janine Aron
  • John Muellbauer

Abstract

There is widespread disagreement about the role of housing wealth in explaining consumption.� This paper exploits liquid and illiquid wealth time series from household balance sheet data for South Africa, previously constructed by the authors, to explain fluctuations in the ratios of consumption and household debt to income in South Africa, from 1971 to 2005.� The paper emphasizes the role of substantial credit liberalization and of wealth, treating credit conditions as a latent variable with key interactions with drivers of consumption and debt.� Credit conditions are proxied by a spline function entering jointly estimated consumption, debt and income expectations equations in a 'latent interactive variable equation system' (LIVES).� The empirical results corroborate the theory in the paper, confirming that consumption relative to income is driven by credit liberalization, fluctuations in a range of asset values and asset accumulation, uncertainty and income expectations, inter alia.� The paper confirms a collateral interpretation of housing wealth on consumption as opposed to a life-cycle interpretation.� The paper also throws important light on the monetary policy transmission mechanism in South Africa.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 580.

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Date of creation: 01 Nov 2011
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Handle: RePEc:oxf:wpaper:580

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Keywords: Consumption; Household debt; Credit market liberalization; credit conditions; Liquid and illiquid wealth; Housing collateral and housing wealth;

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References

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  1. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2001. "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 qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Janine Aron & John Muellbauer & Anthony Murphy, 2010. "Credit, Housing Collateral and Consumption: Evidence from the UK, Japan and the US," Economics Series Working Papers 487, University of Oxford, Department of Economics.
  3. Janine Aron & John Muellbauer, 2002. "Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 185-213.
  4. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  5. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(4), pages 414-435, October.
  6. Janine Aron & John Muellbauer & John Muellbauer, 2000. "Personal and Corporate Saving in South Africa," Economics Series Working Papers WPS/2000-21, University of Oxford, Department of Economics.
  7. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  8. Janine Aron & John Muellbauer, 2006. "Estimates Of Household Sector Wealth For South Africa, 1970-2003," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 52(2), pages 285-307, 06.
  9. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 662, C.E.P.R. Discussion Papers.
  10. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, Elsevier, vol. 6(4), pages 203-217, December.
  11. Muellbauer, John & Williams, David M, 2011. "Credit Conditions and the Real Economy: The Elephant in the Room," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8386, C.E.P.R. Discussion Papers.
  12. Jiri Slacalek, 2006. "What Drives Personal Consumption?: The Role of Housing and Financial Wealth," Discussion Papers of DIW Berlin 647, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. John Duca & John Muellbauer, 2013. "Tobin lives: integrating evolving credit market architecture into flow of funds based macro-models," Working Papers, Federal Reserve Bank of Dallas 1307, Federal Reserve Bank of Dallas.
  2. John N. Muellbauer, 2007. "Housing, credit and consumer expenditure," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 267- 334.
  3. Bruno Albuquerque & Ursel Baumann & Georgi Krustev, 2014. "Has US Household Deleveraging Ended? A Model-Based Estimate of Equilibrium Debt," Working Papers, Banco de Portugal, Economics and Research Department w201404, Banco de Portugal, Economics and Research Department.

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