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The long run relationship between private consumption and wealth: common and idiosyncratic effects

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  • Dreger, Christian
  • Reimers, Hans-Eggert

Abstract

We investigate the long run relationship between private consumption, disposable income and wealth approximated by equity and house price indices for a panel of 15 industrialized countries. Consumption, income and wealth are cointegrated in their common components. The impact of house prices exceeds the effect arising from equity wealth. The long run vector is broadly in line with the life cycle permanent income hypothesis, if house prices are allowed to enter the relationship. At the idiosyncratic level, a long run equilibrium is detected between consumption and income, i.e. the wealth variable can be excluded. The income elasticity in the idiosyncratic relationship is significantly less than unity. Hence, the presence of wealth effects in consumption equations arises from the international integration of asset markets and points to the relevance of risk sharing activities of agents. Without sufficient opportunities, an increase in national saving rates would be expected, leading to a lower path of private consumption expenditures. --

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Bibliographic Info

Paper provided by European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics in its series Discussion Papers with number 295.

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Date of creation: 2011
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Handle: RePEc:zbw:euvwdp:295

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Keywords: permanent income hypothesis; panel cointegration; wealth effects;

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Cited by:
  1. Ansgar Belke & Christian Dreger & Richard Ochmann, 2012. "Do Wealthier Households Save More? – The Impact of the Demographic Factor," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0338, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Nicholas Apergis & Beatrice D. Simo-Kengne & Rangan Gupta, 2013. "The Long-Run Relationship between Consumption, House Prices and Stock Prices in South Africa: Evidence from Provincial-Level Data," Working Papers 201326, University of Pretoria, Department of Economics.

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