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Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia

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  • Nikola Dvornak

    (Reserve Bank of Australia)

  • Marion Kohler

    (Reserve Bank of Australia)

Abstract

This paper addresses the question of how changes in stock market wealth and housing wealth affect consumption expenditure in Australia. We approach the problem using a panel of Australian states, for which we construct data on housing and stock market wealth. We estimate the link between consumption and the components of wealth using panel-data estimation techniques, including fixed-effects instrumental variable and panel DOLS estimators. Unlike previous studies, we find that both housing wealth and stock market wealth have a significant effect on Australian consumption. We estimate that a permanent increase in households’ stock market wealth of one dollar increases annual consumption by 6 to 9 cents in the long run while a permanent increase in housing wealth of one dollar is estimated to increase long-run annual consumption by around 3 cents. However, given that households’ housing assets are more than three times as large as stock market assets, our estimates imply that a one per cent increase in housing wealth has an effect on aggregate consumption that is at least as large as that of a one per cent increase in stock market wealth.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-07.

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Date of creation: Jul 2003
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Handle: RePEc:rba:rbardp:rdp2003-07

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Keywords: consumption; housing wealth; stock market wealth; panel data;

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  1. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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  7. 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 qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  12. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, vol. 79(244), pages 39-56, 03.
  13. Warwick J. McKibbin & Anthony J. Richards, 1988. "Consumption and Permanent Income: The Australian Case," RBA Research Discussion Papers rdp8808, Reserve Bank of Australia.
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  15. Guy Debelle & Bruce Preston, 1995. "Consumption, Investment and International Linkages," RBA Research Discussion Papers rdp9512, Reserve Bank of Australia.
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  17. Lise Pichette, 2000. "Les effets réels du cours des actions sur la consommation," Working Papers 00-21, Bank of Canada.
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