Abstract
The study primarily explores the linkage between wealth effects, arising from stock and housing market channels, and household final consumption for 11 advanced countries over the period from 1970 Q1 to 2015 Q4. As a modelling strategy, we employ regression analysis through the common correlated effects mean group (CCEMG) estimator, as well as Durbin–Hausman cointegration and Dumitrescu and Hurlin (2012) causality tests. The study provides various pieces of evidence through whole-panel and country-level analyses. In this respect, we find that consumption is mostly explained by income and housing wealth is positively and significantly correlated with consumption. As counter-intuitive evidence, we detect a negative linkage between consumption and stock wealth. The evidence also suggests a long-run cointegration relationship among consumption, income, interest rates, housing wealth, and stock wealth. Moreover, we find bidirectional causality between consumption and income, stock wealth, housing wealth, and interest rates. Overall, the evidence implies that housing wealth, rather than stock wealth, is the primary source of consumption growth in advanced countries.
Highlights
The asset price-driven consumption–wealth effect pattern has long been an important economic phenomenon; making stock and housing markets major asset classes1 is key for economic policies for advanced countries
The results suggest that consumption has a long-term relation with income, stock wealth, housing wealth, and interest rates
The results suggest that the impact of housing wealth on consumption is greater than the impact of stock wealth, in line with several studies discussed in Sections 2.2 and 4.2
Summary
The asset price-driven consumption–wealth effect pattern has long been an important economic phenomenon; making stock and housing markets major asset classes is key for economic policies for advanced countries. This paper attempts to conduct detailed econometric analyses In this respect, we first detect cross-sectional dependence in the data by employing CD and bias-adjusted LM tests. Income and wealth components have generally been used as the main variables in the empirical literature; the study employs interest rates to explain consumption. The study provides an interesting framework with which to test the interactions between consumption and stock and housing markets’ wealth channels during major economic/financial periods. The study provides a comparative knowledge set by employing the data of 11 advanced economies This contribution may be interesting, because these countries represent different economic foundations in advanced economies in terms of their size, financial structure (bank-based vs market-based), and geographic diversity.
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