IDEAS home Printed from https://ideas.repec.org/p/iae/iaewps/wp2005n20.html
   My bibliography  Save this paper

Response of Consumption to Income, Credit and Interest Rate Changes in Australia

Author

Listed:
  • Penelope A. Smith

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Lei Lei Song

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper examines the response of consumption to income, credit and interest rate changes in Australia. In contrast to previous studies on consumption in Australian, this paper adopts an Euler equation approach. The Euler equation derives from the consumers' utility maximising problem under the assumption that rule of thumb consumers have borrowing restrictions. To assess the role of credit explicitly, credit variables are also included in the Euler equation. The paper further assumes that coe±cients are time-varying. The results con¯rm the signi¯cant e®ects of income and credit on consumption and also reveal that while consumption growth is not responsive to interest rate changes, the coe±cient on the real interest rate was time varying and the coe±cient becomes smaller in absolute terms since the mid 1990s. This implies that consumption may have been less responsive to interest rate changes since then.

Suggested Citation

  • Penelope A. Smith & Lei Lei Song, 2005. "Response of Consumption to Income, Credit and Interest Rate Changes in Australia," Melbourne Institute Working Paper Series wp2005n20, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2005n20
    as

    Download full text from publisher

    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2005n20.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March.
    2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    3. Hahm, Joon-Ho, 1998. "Consumption adjustment to real interest rates: Intertemporal substitution revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 293-320, February.
    4. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    5. Smith Penelope & Summers Peter M, 2009. "Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modeling Business Cycles," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-19, September.
    6. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
    7. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-279, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ross Guest & Nick Parr, 2010. "The Effects of Family Benefits on Childbearing Decisions: A Household Optimising Approach Applied to Australia," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 609-619, December.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iae:iaewps:wp2005n20. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Abbey Treloar). General contact details of provider: http://edirc.repec.org/data/mimelau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.