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Consumption and Wealth

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Author Info
Alvin Tan (Reserve Bank of Australia)
Graham Voss (Reserve Bank of Australia)

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Abstract

Two remarkable features of the Australian economy over recent years have been strong growth in private consumption expenditure and household wealth. This paper examines the relationship between consumption and wealth in an effort to better understand aggregate consumption behaviour. We find a reasonably robust steady-state relationship between non-durables consumption, labour income and aggregate household wealth for the period 1988:Q4-1999:Q3. Based upon this relationship, an increase in per capita wealth of one dollar is eventually associated with a rise in annual non-durables consumption of approximately four cents. We also find that changes in both non-financial and financial assets have significant effects on consumption. Above-trend growth of wealth in recent years has contributed significantly to growth in consumption over this time. A further noteworthy result concerns the recent demutualisations and share floats in Australia; perhaps surprisingly, we find no evidence that these events had a significant effect on consumption growth. Finally, we place our results within the broader empirical literature and examine whether they are consistent with standard economic theories of consumption.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2000-09.

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Date of creation: Dec 2000
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Handle: RePEc:rba:rbardp:rdp2000-09

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Related research
Keywords: consumption; life-cycle hypothesis; wealth;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
  2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April. [Downloadable!] (restricted)
    Other versions:
  3. Tim Callen, 1991. "Estimates of Private Sector Wealth," RBA Research Discussion Papers rdp9109, Reserve Bank of Australia. [Downloadable!]
  4. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May. [Downloadable!] (restricted)
  5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  6. Clarida, Richard H, 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 851-67, August. [Downloadable!] (restricted)
  7. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  8. Moosa, Imad A & Kennedy, Pauline, 1998. "Modelling Seasonality in the Australian Consumption Function," Australian Economic Papers, Blackwell Publishing, vol. 37(1), pages 88-102, March. [Downloadable!] (restricted)
  9. Guy Debelle & Bruce Preston, 1995. "Consumption, Investment and International Linkages," RBA Research Discussion Papers rdp9512, Reserve Bank of Australia. [Downloadable!]
  10. Clarida, R.H., 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," Discussion Papers 1991_14, Columbia University, Department of Economics.
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  12. Malcom Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Annual Conference Volume, in: Malcom Edey (ed.), The Future of the Financial System Reserve Bank of Australia. [Downloadable!]
  13. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  15. Malcolm Edey & Brian Gray, 1996. "The Evolving Structure of the Australian Financial System," RBA Research Discussion Papers rdp9605, Reserve Bank of Australia. [Downloadable!]
  16. Sydney Ludvigson & Charles Steindel, 1999. "How important is the stock market effect on consumption?," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 29-51. [Downloadable!]
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  17. Maria W. Otoo, 1999. "Consumer sentiment and the stock market," Finance and Economics Discussion Series 1999-60, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  18. 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. [Downloadable!] (restricted)
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Cited by:
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  1. Ricardo M. Sousa, 2009. "Wealth Effetcs on Consumption: Evidence from the euro area," NIPE Working Papers 12/2009, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  2. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Wealth Effects in Emerging Market Economies," NIPE Working Papers 4/2009, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  3. Ricardo M. Sousa, 2003. "Property of stocks and wealth effects on consumption," NIPE Working Papers 2/2003, NIPE - Universidade do Minho. [Downloadable!]
  4. Malcom Edey & Luke Gower, 2000. "National Saving: Trends and Policy," RBA Annual Conference Volume, in: David Gruen & Sona Shrestha (ed.), The Australian Economy in the 1990s Reserve Bank of Australia. [Downloadable!]
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