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Consumption and Wealth in the US, the UK and the Euro Area:A Nonlinear Investigation

This paper assesses the importance of nonlinearity in estimating the wealth effects on consumption for the US, the UK and the Euro area. We look at the impact of both (i) aggregate wealth and (ii) disaggregate wealth, namely, by comparing financial wealth effects with housing wealth effects. We also assess the magnitude of the response of consumption using both a linear model and two nonlinear approaches (a quantile regression and a smooth transition regression). We find that the elasticity of consumption with respect to aggregate wealth is largest for the UK and housing wealth effects do not seem to be relevant in the Euro area. As for the quantile regression, it shows that the sensitivity of consumption with respect to wealth and income variation is larger when consumption growth is abnormally high, i.e. during periods of economic booms. The smooth transition regression model is able to track reasonably well the consumption patterns during periods of economic downturn, financial instability and housing market corrections. Our approaches uncover a more complex dynamics of the relationship between consumption and wealth than previous results in the literature, whilst being in accordance with the theoretical background underlying the wealth effects on consumption.

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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2012/NIPE_WP_24_2012.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 24/2012.

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Date of creation: 2012
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Handle: RePEc:nip:nipewp:24/2012
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htmEmail:


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  1. Sushanta Mallick & Mohammed Mohsin, 2010. "On the real effects of inflation in open economies: theory and empirics," Empirical Economics, Springer, vol. 39(3), pages 643-673, December.
  2. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2012. "How does fiscal policy react to wealth composition and asset prices?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 874-890.
  3. Sousa, Ricardo M., 2010. "Consumption, (dis)aggregate wealth, and asset returns," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 606-622, September.
  4. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  5. Michael G. Arghyrou & John D. Tsoukalas, 2010. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," CESifo Working Paper Series 3266, CESifo Group Munich.
  6. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  7. Chattopadhyay, Amit K. & Mallick, Sushanta K., 2007. "Income distribution dependence of poverty measure: A theoretical analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 377(1), pages 241-252.
  8. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Castro, Vítor & Sousa, Ricardo M., 2012. "How do central banks react to wealth composition and asset prices?," Economic Modelling, Elsevier, vol. 29(3), pages 641-653.
  10. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  12. Sushanta Mallick & Brigitte Granville, 2005. "How best to link poverty reduction and debt sustainability in IMF-World Bank models?," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(1), pages 67-85.
  13. William Barnett & Marcelle Chauvet & Heather L. R. Tierney, 2007. "Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200706, University of Kansas, Department of Economics, revised Aug 2008.
  14. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
  15. repec:ebl:ecbull:v:5:y:2008:i:17:p:1-11 is not listed on IDEAS
  16. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  17. Sousa, Ricardo M., 2010. "Housing wealth, financial wealth, money demand and policy rule: Evidence from the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 88-105, March.
  18. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
  19. Jawadi, Fredj & Leoni, Patrick, 2012. "Nonlinearity, Cyclicity, And Persistence In Consumption And Income Relationships: Research In Honor Of Melvin J. Hinich," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S3), pages 376-393, November.
  20. Michael Arghyrou, 2007. "The price effects of joining the euro: modelling the Greek experience using non-linear price-adjustment models," Applied Economics, Taylor & Francis Journals, vol. 39(4), pages 493-503.
  21. Michael Arghyrou, 2009. "Monetary policy before and after the euro: evidence from Greece," Empirical Economics, Springer, vol. 36(3), pages 621-643, June.
  22. Barnett, William A. & Chauvet, Marcelle, 2011. "How better monetary statistics could have signaled the financial crisis," Journal of Econometrics, Elsevier, vol. 161(1), pages 6-23, March.
  23. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
  24. repec:ebl:ecbull:v:3:y:2004:i:20:p:1-16 is not listed on IDEAS
  25. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  26. JAWADI Fredj, 2008. "Does nonlinear econometrics confirm the macroeconomic models of consumption?," Economics Bulletin, AccessEcon, vol. 5(17), pages 1-11.
  27. Davidson, James E. H. & Hendry, David F., 1981. "Interpreting econometric evidence : The behaviour of consumers' expenditure in the UK," European Economic Review, Elsevier, vol. 16(1), pages 177-192.
  28. Roger Koenker & Zhijie Xiao, 2002. "Inference on the Quantile Regression Process," Econometrica, Econometric Society, vol. 70(4), pages 1583-1612, July.
  29. Granville, Brigitte & Mallick, Sushanta, 2009. "Monetary and financial stability in the euro area: Pro-cyclicality versus trade-off," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 662-674, October.
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