Wealth and Consumption: An Assessment of the International Evidence

51 Pages Posted: 30 Dec 2005

See all articles by Vincent Labhard

Vincent Labhard

European Central Bank (ECB) - Directorate General Economics

Gabriel Sterne

Bank of England

Chris Young

Bank of England

Date Written: October 2005

Abstract

The main objective of this paper is to offer a critique of the existing literature on the link between wealth and consumption, as captured by the long-run marginal propensity to consume from financial wealth (mpcw). The international evidence suggests that the mpcw varies considerably across countries, and new estimates are presented, based on structural vector autoregressions (VARs) for eleven OECD countries, which tend to confirm this finding. It is argued that there is little theoretical rationale for a wide cross-country dispersion of the mpcw, and that the cross-country differences in empirical estimates may in fact reflect difficulties in the measurement of wealth across countries and a failure to account for the shocks causing changes in both consumption and wealth. Using a suitable panel technique, it is found that the hypothesis of a common long-run mpcw across countries cannot be rejected consistently, and a plausible estimate is obtained for the cross-section of eleven OECD countries. This estimate is a little over 6%, broadly consistent with estimates used in a wide range of policy models.

Keywords: wealth effects, consumption, dynamic panel

JEL Classification: C22, C23, E21.

Suggested Citation

Labhard, Vincent and Sterne, Gabriel and Young, Chris, Wealth and Consumption: An Assessment of the International Evidence (October 2005). Bank of England Working Paper Series No. 275. Available at SSRN: https://ssrn.com/abstract=872685 or http://dx.doi.org/10.2139/ssrn.872685

Vincent Labhard (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Gabriel Sterne

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Chris Young

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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