Aggregate Consumption and Wealth in the Long Run: The Impact of Financial Liberalization

IFN Working Paper nr 1339. Stockholm: Research Institute of Industrial Economics (IFN), 2020

42 Pages Posted: 15 Oct 2020

See all articles by Malin Gardberg

Malin Gardberg

Research Institute of Industrial Economics (IFN)

Lorenzo Pozzi

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: August 2020

Abstract

This paper investigates the impact of financial liberalization on the relationship between consumption and total wealth (i.e., the sum of asset wealth and human wealth). Financial liberalization is persistent and may signal changes in expected future consumption growth rates and/or in rates of return on wealth that, through the inter-temporal budget constraint, affect the current consumption-wealth ratio. We estimate the long-run relationship between consumption, total wealth and financial liberalization by state space methods using quarterly US data. The results show that the trend in the consumption-wealth ratio is well-captured by our baseline liberalization indicator. We find that the increase in this indicator over the sample period has increased the consumption-wealth ratio with about ten to sixteen percent. Investigating the responsible channel, additional estimates show that financial liberalization has predictive power for aggregate consumption growth rather than for returns, a result that supports an incomplete markets interpretation of the link between liberalization and the consumption-wealth ratio.

Keywords: consumption, wealth, financial liberalization, incomplete markets, state space model

JEL Classification: E21, C32, C11

Suggested Citation

Gardberg, Malin and Pozzi, Lorenzo, Aggregate Consumption and Wealth in the Long Run: The Impact of Financial Liberalization (August 2020). IFN Working Paper nr 1339. Stockholm: Research Institute of Industrial Economics (IFN), 2020, Available at SSRN: https://ssrn.com/abstract=3680534 or http://dx.doi.org/10.2139/ssrn.3680534

Malin Gardberg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lorenzo Pozzi

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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