The effects of financial and real wealth on consumption: new evidence from OECD countries

Abstract

In this article we present new estimates of the effect of household financial and real wealth on consumption. The analysis refers to 11 Organization for Economic Co-operation and Developoment (OECD) countries and takes into account quarterly data from 1997 to 2008. Unlike most of the previous literature on European countries, we measure financial wealth using quarterly harmonized data on household financial assets and liabilities, which have been gathered from the flow of funds. For comparison, we also employ as a proxy for financial wealth national share price indices. We rely on standard static panel and single-country level autoregressive distributed lag estimations. Furthermore, we implement a recent econometric approach that allows for more flexible assumptions in the nonstationary panel framework under consideration. Our results show that both net financial wealth and real wealth have a positive effect on consumption. Overall, the influence of net financial assets is stronger than that of real assets.

Keywords:

• consumption
• household financial and real wealth
• wealth effects
• panel cointegration

JEL Classification::

• C23
• E21
• E44

Acknowledgements

We would like to thank the Editor and an anonymous referee for helpful comments that greatly helped improving the article over earlier versions. For offering insights into this work, special thanks go to Piero Catte, Marco Magnani, Giovanni Mastrobuoni, Andrea Mercatanti and Franco Peracchi. This article also benefited from comments made by participants at the 57th International Statistical Institute Conference, Durban, South Africa (16–22 August 2009) and at the 50th Riunione Scientifica Annuale della Società Italiana degli Economisti, Rome (22–24 October 2009). This article is the responsibility of its authors and the opinions expressed here do not necessarily reflect those of the Bank of Italy or the Eurosystem.

Notes

¹ See Paiella (2007) and ECB (2009) for surveys which include the household-level evidence on wealth effects.

² These data are taken from the World Market Monitor provided by Global Insight.

³ We are grateful to Michael Andreasch (Austrian Nationalbank), Matti Okko (Bank of Finland), Francesco Zollino (Bank of Italy), and Pedro Abad Fernandez-Canaveral (Bank of Spain) for providing us with estimates of real wealth data. For Portugal, we refer to Cardoso et al. (2008).

⁴ We are grateful to Joakim Westerlund for providing us with the GAUSS code to implement the panel LM test for the null of cointegration with multiple breaks.

⁵ Other transformations are possible. For instance, a log-linear specification was often suggested, if the interest centers on estimating elasticities of consumption with respect to wealth and income.

⁶ Estimation is carried out by using a properly modified version of the GAUSS program provided by Professor M.H. Pesaran at the webpage http://www.econ.cam.ac.uk/faculty/pesaran/.