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A forward-looking model of aggregate consumption in New Zealand

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  • David Rae

Abstract

An aggregate consumption function is estimated for New Zealand from 1974 to 1995. The instability of previous New Zealand models is addressed by using a broad measure of net wealth and a theoretically more sound measure of income. Households are assumed to be forward-looking, but only partly so. They form rational expectations of next year's real income, but thereafler use a simple rule of thumb: real income will grow at a constant rate. An econometrically stable cointegrating equation is estimated and it performs well out of sample. The main conclusions are that consumption closely follows net wealth over both short and long time horizons; it responds more to expectations of future household income than to current income; there is a strong negative relationship between savings and house prices, but no corresponding link to equity prices; and the impact of real interest rates on savings is positive but weak and possibly insignificant.

Suggested Citation

  • David Rae, 1997. "A forward-looking model of aggregate consumption in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 31(2), pages 199-220.
  • Handle: RePEc:taf:nzecpp:v:31:y:1997:i:2:p:199-220
    DOI: 10.1080/00779959709544274
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    References listed on IDEAS

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    1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    2. Brendan O'Donovan & David Rae, 1997. "The determinants of house prices in New Zealand: An aggregate and regional analysis," New Zealand Economic Papers, Taylor & Francis Journals, vol. 31(2), pages 175-198.
    3. Rae, David, 1996. "NBNZ-DEMONZ: A dynamic equilibrium model of New Zealand," Economic Modelling, Elsevier, vol. 13(1), pages 91-165, January.
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    10. David F. Hendry, 2013. "Econometric Modelling: The ‘Consumption Function’ In Retrospect," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(5), pages 495-522, November.
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    1. Hall, Viv B. & Rae, David, 1998. "Fiscal expansion, monetary policy, interest rate risk premia, and wage reactions," Economic Modelling, Elsevier, vol. 15(4), pages 621-640, October.

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