Wealth Effects on Consumption in Taiwan: An Application of the Multivariate Markov Regime-Switching Model
Abstract“The buffer stock theory” derived from the intertemporal utility maximization predicts that an increase in wealth will dampen the motive for precautionary savings and therefore reduce consumption’s over-sensitivity with respect to income changes. Since over the last forty years Taiwan has more than once experienced sharp rises in the values of stock market and real estate, the goal of this paper is to examine whether the prediction of the buffer stock theory holds in Taiwan. The empirical model we propose is a trivariate two-state Markov regime-switching model that is originated from Euler equation for consumption growth. The three macro variables we consider are the real non-durable good consumption growth, the real GDP growth, and the real growth in stock market total value. It is assumed that these three variables are subject to the same Markov regime-switching variable in determining their two states. Our empirical results using Taiwan’s quarterly data suggest a high growth state and a low growth one: the former includes 1973Q3, 1973Q4, 1978Q3, 1987Q2 – 1990Q1, 1991Q2, and 1991Q3. The main finding of this paper is as follows: It is indeed the precautionary savings motive that causes the aggregate consumption in Taiwan to be overly sensitive to income changes, just as the buffer stock theory has predicted. When wealth in Taiwan, symbolized by the values of stock market, increased substantially under the high growth state, consumers’ precautionary savings motive weakened and the over-sensitivity phenomenon to a large extent disappeared.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 04-A007.
Length: 25 pages
Date of creation: Feb 2004
Date of revision:
Contact details of provider:
Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
More information through EDIRC
消費過度敏感現象; 預防性儲蓄動機; 財富效果; 三變量結構轉換模型;
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HsiaoyunLiu).
If references are entirely missing, you can add them using this form.