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Consumption and Wealth

  • Alvin Tan

    (Reserve Bank of Australia)

  • Graham Voss

    (Reserve Bank of Australia)

Two remarkable features of the Australian economy over recent years have been strong growth in private consumption expenditure and household wealth. This paper examines the relationship between consumption and wealth in an effort to better understand aggregate consumption behaviour. We find a reasonably robust steady-state relationship between non-durables consumption, labour income and aggregate household wealth for the period 1988:Q4–1999:Q3. Based upon this relationship, an increase in per capita wealth of one dollar is eventually associated with a rise in annual non-durables consumption of approximately four cents. We also find that changes in both non-financial and financial assets have significant effects on consumption. Above-trend growth of wealth in recent years has contributed significantly to growth in consumption over this time. A further noteworthy result concerns the recent demutualisations and share floats in Australia; perhaps surprisingly, we find no evidence that these events had a significant effect on consumption growth. Finally, we place our results within the broader empirical literature and examine whether they are consistent with standard economic theories of consumption.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2000-09.

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Date of creation: Dec 2000
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Handle: RePEc:rba:rbardp:rdp2000-09
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  1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  2. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  3. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  4. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, March.
  5. Gali, Jordi, 1990. "Finite horizons, life-cycle savings, and time-series evidence on consumption," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 433-452, December.
  6. 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.
  7. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
  8. Clarida, Richard H, 1991. "Aggregate Stochastic Implications of the Life Cycle Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 851-67, August.
  9. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  10. Nilss Olekalns, 1997. "Has Financial Deregulation Revived the Permanent Income/Life Cycle Hypothesis?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(2), pages 155-166.
  11. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, March.
  12. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  13. John Shea, 1996. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," NBER Technical Working Papers 0193, National Bureau of Economic Research, Inc.
  14. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.).
  15. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  16. Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
  17. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  18. Moosa, Imad A & Kennedy, Pauline, 1998. "Modelling Seasonality in the Australian Consumption Function," Australian Economic Papers, Wiley Blackwell, vol. 37(1), pages 88-102, March.
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