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The Relationship between Consumption, Income and Wealth in Hong Kong


  • Joanne Cutler

    (Hong Kong Institute for Monetary Research)


The aim of this paper is two-fold. First, to try to estimate a consumption function for Hong Kong along the lines of the standard Life- Cycle Model formulated by Ando and Modigliani (1963). Second, to use the estimated relationship to quantify the effect on consumption from the sharp fall in property prices since 1997. Estimating a consumption function for Hong Kong is not a straightforward exercise given the lack of official quarterly estimates of household sector income and wealth. The paper reports the results of empirical tests between alternative proxies for aggregate labour income which are derived from 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 implied marginal propensity to consume out of housing wealth is estimated to be 0.03, which is lower than previous estimates for Hong Kong and estimates for other industrialised economies. It is argued that this is consistent with an uneven distribution of housing wealth in Hong Kong, skewed towards rich households. The owner- occupation rate in Hong Kong is under 50% which is low compared with other industrialised economies, reflecting the importance of the private and public rented sector. Nevertheless, a 10% increase in house prices is estimated to raise aggregate consumption by around 1% in Hong Kong, similar to the estimates for the US, UK and Canada, reflecting the overall size of housing assets relative to consumption. Based on this estimate, the 52% drop in housing wealth since 1997 would, if sustained, reduce consumption by HKD 66 billion, or just under 9% of annual 2001 consumption. The actual fall in consumption between 1997 and 2001 was 7.6% so the decline in housing wealth can, arithmetically, more than account for the weakness of consumption since then. For financial wealth, the implied marginal propensity to consume for Hong Kong is estimated to be between 0.02 and 0.04, similar to estimates for the US, UK and Canada. This is partly calibrated due to data limitations, and is consistent with survey information suggesting that the level of share ownership among households in Hong Kong is comparable to that in the US, UK and Canada but higher than in European countries. The implied long run marginal to propensity to consume out of labour income is 0.87, broadly in line with estimates for other industrial countries, e.g. the UK. There is some evidence that this has fallen in the second half of the sample period, possibly reflecting increased volatility in the macro economy following a sequence of negative shocks (the decline in asset prices in 1993-94; the Asian Financial Crisis in 1997-98; and the global recession post-2000).

Suggested Citation

  • Joanne Cutler, 2004. "The Relationship between Consumption, Income and Wealth in Hong Kong," Macroeconomics 0403013, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0403013
    Note: Type of Document - pdf; pages: 28. HKIMR Working Paper No.1/2004

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    References listed on IDEAS

    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 971-987, December.
    2. 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.
    3. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    4. repec:fth:harver:1435 is not listed on IDEAS
    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. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-692, December.
    7. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
    8. Yash P. Mehra, 2001. "The wealth effect in empirical life-cycle aggregate consumption equations," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67.
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    Cited by:

    1. Yu-Fu Chen & Michael Funke & Aaron Mehrotra, 2017. "What Drives Urban Consumption in Mainland China? The Role of Property Price Dynamics," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 383-409, August.
    2. Li-gang Liu & Laurent Pauwels & Andrew Tsang, 2007. "How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption," Working Papers 0720, Hong Kong Monetary Authority.
    3. Funke, Michael & Paetz, Michael & Pytlarczyk, Ernest, 2011. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Economic Modelling, Elsevier, vol. 28(1-2), pages 316-334, January.
    4. Victor Chernozhukov & Roberto Rigobon & Thomas M. Stoker, 2009. "Set identification with Tobin regressors," CeMMAP working papers CWP12/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. Li-gang Liu & Laurent Pauwels & Andrew Tsang, 2007. "Hong Kong's Consumption Function Revisited," Working Papers 0716, Hong Kong Monetary Authority.

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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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