RDP 2000-09: Consumption and Wealth 4. Conclusions

The preceding analysis presents an empirical model for aggregate consumption behaviour over the late 1980s and 1990s in Australia. For this period, we identify a steady-state relationship between non-durables consumption, labour income and household wealth. Based upon this relationship, an increase in aggregate per capita wealth of one dollar is eventually associated with a rise in annual non-durables consumption of approximately four cents. This is somewhat smaller than other estimates but not inconsistent with economic theory. Conditional on the steady-state relationship, we also estimate a short-run model of consumption. Here we find the result that changes to household net non-financial wealth and financial wealth are an important determinant of consumption growth throughout the 1990s, particularly in recent years.

Although we believe our results provide a reasonably robust description of consumption behaviour in Australia for the sample period we examine, we stress that it is not complete. One feature of the data over the whole of the 1980s and 1990s is apparent structural change in the long-run behaviour of consumption, income and wealth. Our analysis sidesteps this issue by concentrating on a sample where these series appear to be stable. This suits our purposes but has at least two drawbacks. First, it limits the data we have available and reduces confidence in our results. Specifically, we cannot be certain that the relationship we identify between consumption and wealth is a stable behavioural relationship or an artefact of the sample we consider.

More importantly, it leaves unexplained what underlies the long-run behaviour of these series. It is commonly viewed that financial deregulation and innovation are at least partly responsible for changing trends in consumption relative to household income but in fact the evidence for this is largely indirect. Demographic variables and changing institutional structures, such as compulsory superannuation, may also be important but to our knowledge these have not been fully explored. A very useful direction for future research is to attempt to properly explain the changing long-run behaviour of consumption and its determinants within a suitable theoretical framework.