The Relationship between Consumption, Income and Wealth in Hong Kong
This paper sets out to estimate a consumption function for Hong Kong along the lines of the standard Life-Cycle Model formulated by Ando and Modigliani (1963). This is not a straightforward exercise given the lack of official estimates of household sector income and wealth holdings in Hong Kong. The paper reports the results of empirical tests between alternative proxies for aggregate labour income which are derived from official estimates of average pay and employment, and employs a new series developed by the Hong Kong Monetary Authority for private sector housing wealth. We find a stable relationship between consumption, labour income and wealth in Hong Kong with plausible long run estimates of the implied marginal propensity to consume out of income and wealth. In particular, the marginal propensity to consume out of housing wealth is estimated to be lower than in other industrialised economies which is consistent with a relatively uneven distribution of wealth in Hong Kong. Arithmetically, the decline in housing wealth in Hong Kong since 1997 can more than account for the weakness of consumption since then.
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