RDP 2003-07: Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia 2. Related Literature

The effect of wealth on consumption has been studied extensively in the empirical literature on consumption functions. In this section we provide a brief overview of the findings of these studies.^[2]

Few studies have examined the relationship between consumption and total wealth for Australia. Tan and Voss (2003) have estimated the marginal propensity to consume (MPC) out of total wealth at 0.04 or, in other words, that long-run annual consumption increases by 4 cents in response to a one dollar increase in wealth. Bertaut (2002) puts this number marginally higher at 0.05. In an earlier study, McKibbin and Richards (1988) found an MPC of 0.02, but they point out that this may be understated due to the poor quality of wealth data for their estimation period. This compares with estimated MPCs from total wealth of around 0.03 to 0.07 for the US. Estimates for Canada are in the region of 0.05 to 0.08, while for the UK the estimates range from 0.02 to 0.04.^[3]

Many studies have concentrated on the effect of stock market wealth on consumption. For Australia, Tan and Voss (2003) estimate an MPC in the range of 0.04 to 0.16. The corresponding effect for the US is estimated to range from 0.03 to 0.075, and for Canada from 0.045 to 0.08. For the UK it ranges from 0.04 to 0.045, whereas for the other G7 countries it is estimated to be less than 0.02. The strong effect for the US compared with many European countries is often justified by the less concentrated distribution of stock ownership across households, and the larger share of stock ownership relative to households' other financial assets.^[4]

Fewer studies have estimated the effect of housing wealth on consumption. Estimates of the housing wealth effect range from 0.03 to 0.05 for the US and from 0.02 to 0.08 for the UK^[5]. When estimated jointly with the stock market effect, the housing wealth effect is often found to be insignificant. Case et al (2001) report a number of US studies, which – using aggregate- or household-level data – have had difficulty in finding a significant housing wealth effect. For Australia, Tan and Voss (2003) find an insignificant long-run effect of housing wealth while the stock market effect is significant. As discussed by Case et al (2001) this result may be due to multicollinearity, which our study addresses by using a panel of Australian states. We find a significant long-run effect of both stock market and housing wealth on consumption, consistent with Kent and Lowe (1998) who argue that house prices have been an important determinant of consumption in Australia.

Footnotes

The effects of wealth on consumption are typically measured as either marginal propensities to consume (MPC) or elasticities. For ease of comparison, we have provided all results in the form of MPCs. MPCs measure by how many dollars consumption increases if wealth increases by one dollar. Elasticities measure by how many per cent consumption increases if wealth increases by one per cent. Elasticities can be converted into MPCs by multiplying with the ratio of consumption to wealth. [2]

Bertaut (2002) and Girouard and Blondal (2001) investigate the US, Canada and the UK in cross-country studies. See also IMF (2000) and Boone, Giorno and Richardson (1998) for the US; Boone, Girouard and Wanner (2001) and Macklem (1994) for Canada; and Boone et al (2001) for the UK. [3]

For the US see Boone et al (1998), Starr-McCluer (1998) and Brayton and Tinsley (1996). For Canada, the UK and the other G7 countries see Bertaut (2002), Boone et al (2001), Boone et al (1998), Pichette (2000) and Deutsche Bundesbank (2003). [4]

See for example Boone et al (2001) and Girouard and Blondal (2001). For Canada Boone et al (2001) report a coefficient on housing wealth in excess of 0.1. This seems very high but this may be partly due to their specification, which implies that their coefficients are semi-elasticities rather than MPCs. [5]