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The tax system and housing demand in New Zealand

This paper characterises the relationship between wealth and consumption in New Zealand. We find that there exists a long-run cointegration relation between household consumption, income, housing wealth and net financial wealth. Permanent shocks account for most of the variation in wealth. This implies that our cointegration estimates accurately capture the effect of most wealth changes, in contrast with the findings of Lettau and Ludvigson (2004) for the United States. Our estimates suggest that consumption has adjusted sluggishly to restore longrun equilibrium, but also that consumption booms have anticipated equilibrium-restoring increases in housing wealth. Furthermore, we estimate two alternative econometric models which are more robust to instability in the long-run relationship. All three of our models suggest that permanent changes in wealth have economically important effects on consumption. The dollar-for dollar-effect of financial wealth exceeds that of housing wealth.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2008/dp08_06.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2008/06.

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Length: 21 p.
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:nzb:nzbdps:2008/06
Contact details of provider: Postal: P.O. Box 2498, Wellington
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Fax: 64 4 471-2270
Web page: http://www.rbnz.govt.nz
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  1. 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.
  2. James M. Poterba, 1992. "Taxation and Housing: Old Questions, New Answers," NBER Working Papers 3963, National Bureau of Economic Research, Inc.
  3. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
  4. Roger Gordon, 2004. "Taxation of Interest Income," International Tax and Public Finance, Springer, vol. 11(1), pages 5-15, January.
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