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Debt Dynamics and the Relationship Between Consumption and Cyclical Wealth Changes

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  • EMMANUEL DE VEIRMAN
  • ASHLEY DUNSTAN

Abstract

We analyse the consumption-wealth relationship using a framework that accounts for transitory variation in wealth, and in a setting where transitory variation in household net worth is not dominated by boom and bust cycles in stock markets. We find that transitory variation in consumption depends positively on recent transitory changes in wealth. In addition, we find that gross asset wealth and household debt are positively related. Both findings constitute departures from standard lifecycle/ permanent income hypothesis theory with complete financial markets, but can be explained by the introduction of liquidity constraints.
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Suggested Citation

  • Emmanuel De Veirman & Ashley Dunstan, 2012. "Debt Dynamics and the Relationship Between Consumption and Cyclical Wealth Changes," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 330-340, September.
    • Handle: RePEc:bla:ecorec:v:88:y:2012:i:282:p:330-340
    DOI: j.1475-4932.2012.00812.x
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    File URL: http://hdl.handle.net/10.1111/j.1475-4932.2012.00812.x
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    References listed on IDEAS

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    1. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October.
    2. François Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
    3. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series 2007/10, Center for Financial Studies (CFS).
    4. Sven Rady & François Ortalo-Magné, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CESifo Working Paper Series 470, CESifo.
    5. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
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    Cited by:

    1. Daan Steenkamp, 2010. "New Zealand’s imbalances in a cross-country context," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, pages 37-49, December.
    2. De Veirman Emmanuel & Dunstan Ashley, 2011. "Time-Varying Returns, Intertemporal Substitution and Cyclical Variation in Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-41, July.
    3. Mark J. HOLMES & Xin SHEN, 2015. "On Wealth Volatility, Asymmetries And The Average Propensity To Consume In The United States," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 15(1), pages 69-78.

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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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