Private Sector Expenditure and Financial Asset Accumulation in the U.K.

Abstract

THE GROWING TENDENCY in economic theory is to analyze macroeconomic problems in the context of portfolio choice, with the most notable work in this field being that of Brainard and Tobin [2], and Tobin [12]. Typically portfolio decisions are assumed independent of spending decisions regarding the scale of activity. The homogeneity of portfolio behavior with respect to wealth, combined with appropriate balance sheet identities, implies a series of adding up conditions that need to be fulfilled when constructing individual portfolio equations. In this paper we propose an alternative approach to investment decisions including decisions regarding consumer durables and inventories. We argue that financial and commodity assets are considered part of the same portfolio decision, where closely related assets are nested so as to represent a multilevel sequential decision-making process. We regard households as deciding primarily about scales of assets size of house, of family, of cars, of heating, etc. and secondarily being involved in a consequent maintenance decision (nondurable consumption) running the house, feeding the family, servicing the car, etc. In the case of firms, we see them as deciding on a scale of physical assets in combination with a financial assets liability, and this involves a maintenance decision (or capital consumption). This amounts to putting the portfolio's composition in the center of