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Consumption and Wealth

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  • Alvin Tan

    (Reserve Bank of Australia)

  • Graham Voss

    (Reserve Bank of Australia)

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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Bibliographic Info

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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Keywords: consumption; life-cycle hypothesis; wealth;

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References

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  1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, October.
  2. 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.
  3. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  4. John Shea, 1996. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," NBER Technical Working Papers 0193, National Bureau of Economic Research, Inc.
  5. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  6. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  7. Moosa, Imad A & Kennedy, Pauline, 1998. "Modelling Seasonality in the Australian Consumption Function," Australian Economic Papers, Wiley Blackwell, vol. 37(1), pages 88-102, March.
  8. 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.
  9. Martha Starr-McCluer, 2002. "Stock Market Wealth and Consumer Spending," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 69-79, January.
  10. Clarida, R.H., 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," Discussion Papers 1991_14, Columbia University, Department of Economics.
  11. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, May.
  12. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
  13. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, October.
  14. Olekalns, N, 1997. "Has Financial Deregulation revived the Permanent Income/Life Cycle Hypothesis?," Department of Economics - Working Papers Series 564, The University of Melbourne.
  15. repec:fth:coluec:544 is not listed on IDEAS
  16. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  17. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December.
  18. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, October.
  19. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
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Citations

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Cited by:
  1. 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.
  2. Peltonen, Tuomas A. & Sousa, Ricardo M. & Vansteenkiste, Isabel, 2009. "Wealth effects in emerging market economies," Working Paper Series 1000, European Central Bank.
  3. Thomas Nitschka, 2007. "International evidence for return predictability and the implications for long-run covariation of the G7 stock markets," IEW - Working Papers 338, Institute for Empirical Research in Economics - University of Zurich.
  4. Dreger, Christian & Reimers, Hans-Eggert, 2011. "The long run relationship between private consumption and wealth: common and idiosyncratic effects," Discussion Papers 295, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
  5. Ricardo M. Sousa, 2003. "Property of stocks and wealth effects on consumption," NIPE Working Papers 2/2003, NIPE - Universidade do Minho.
  6. Sousa, Ricardo M., 2009. "Wealth effects on consumption: evidence from the euro area," Working Paper Series 1050, European Central Bank.
  7. Bin Li & Benjamin Liu & Eduardo Roca, 2010. "An Empirical Investigation of Consumption CAPMs in the Australian Market," Discussion Papers in Finance finance:201011, Griffith University, Department of Accounting, Finance and Economics.
  8. David M. Williams, 2010. "Consumption, wealth and credit liberalisation in Australia," Economics Series Working Papers 492, University of Oxford, Department of Economics.

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