Nonhuman Wealth Research Articles

Aggregate Wealth in Canada

This paper describes a comprehensive measure of aggregate private-sector wealth in Canada that includes both human and nonhuman wealth. Wealth and its components are measured at a quarterly frequency from 1963 to 1994. Human wealth is computed as the expected present value of aggregate labor income net of government expenditures using a finite-state Markov approximation to an estimated bivariate VAR for the real interest rate and net income growth. Nonhuman wealth is constructed by consolidating the assets and liabilities of the various sectors of the economy. To the extent possible, assets and liabilities are measured at market value.

On the Proportionality and Homogeneity of Consumption and Income

In its certainty equivalence form, consumption is proportional to the sum of human and non-human wealth. With labour income uncertainty the proportionality takes the form of homogeneity of consumption with respect to the components of wealth. In this paper we analyse the stochastic properties of labour income that yield the homogeneity property

Exchange rates and the European business cycle: An application of a quasi-empirical two-country model

A quasi-empirical symmetric two-country model is used to analyse the case in which country A, as an anchor country, pursues price stability as its main priority, whereas country B stresses exchange rate stability. Problems will arise, in particular for the latter country, when in country A contractionary tax and monetary policy measures are taken after expansionary wage impulses have occurred. In addition, the analysis should shed light upon the recent problems of a European stagnation within an unstable European Monetary System. The model, presented as an exempli gratia in order to promote quasi-empirical modelling, integrates the q theory of investment with the approach of a portfolio choice in which both domestic and foreign agents spread their non-human wealth over imperfectly substitutable domestic and foreign share capital, domestic and foreign government bonds, domestic and foreign treasury bills, domestic and foreign time deposits and domestic and foreign money. Within the framework of fixed or floating exchange rates, rigid labour markets, sticky price and/or flexible price regimes in the goods markets, due account is taken of capital accumulation, government debt and current account dynamics. The analysis shows why politicians have fundamental reasons to question the usefulness of a European Monetary Union within a framework of fixed exchange rates. The pros of the latter system are probably outweighed by the cons.

Savings, pension rights and taxation

The voluntary saving rate has declined in The Netherlands over the last thirty years. In this paper the increasing share of transfer income in total income, with a high propensity to consume, and the increase in collective pension schemes are simultaneously used to explain this development. Furthermore, the influence of taxes is modelled. The planning horizon of the representative consumer is treated as a parameter to be estimated. The planning horizon obtained (about 4.5 years) appears to be short compared to expected residual lifetime, implying rather small interest elasticities. The estimation results indicate that, in case the obligatory pension schemes are diminished, the representative consumer offsets the loss in pension benefits for 75 per cent by voluntary, additional accumulation of nonhuman wealth in the long run. The working of the model is illustrated by simulation experiments.

Wealth, structural adjustment and optimal recovery from the Dutch disease

We analyse how an oil-exporting economy producing traded and non-traded goods should adjust when its oil wealth depreciates unexpectedly and intersectoral transfer of labour is costly. Optimal adjustment involves decreasing consumption and a gradual loss of non-human wealth before a new long-run equilibrium is established. In the short run the relative price of non-traded goods undershoots its long-run equilibrium. Moreover, the competitive wage differential widens initially and then gradually decreases. An external borrowing constraint will slow down the optimal adjustment process. The long-run implications of a borrowing constraint are higher consumption of both goods and a smaller sector producing traded goods.

Wealth, income, and consumption in a developing economy

This paper examines the scope and application of the Permanent Income Hypothesis (PIH) in a new way. The authors have computed data on the nonhuman wealth of India for 26 years. Varying parameter regressions are applied to calculate values of permanent income, permanent consumption, transitory income and transitory consumption directly from the wealth data. The proportionality aspect of the PIH as well as its basic assumptions regarding the zero correlation between the permanent and the transitory elements of income, between the permanent and transitory elements of consumption and between the transitory elements of income and consumption are tested. The results of this paper are broadly consistent with the PIH.

Finite horizons, life-cycle savings, and time-series evidence on consumption

This paper develops an explicitly aggregated life-cycle model which allows for finite horizons and declining individual labor supply. The model can generate a common upward trend in aggregate consumption, labor income, and nonhuman wealth, without relinquishing Hall's random walk at the micro level. Life-cycle factors are shown to imply that consumption changes should be (a) predictable and (b) smoother than in the infinite-horizon model. Econometric evidence using postwar U.S. data suggests that neither consumption's predictability nor its excess smoothness can be fully accounted for by life-cycle considerations.

Terms-of-Trade Shock and the Current Account in a Monetary Economy

Over the period 1973-81, the terms of trade of non-oil developing countries deteriorated at about 2 per cent per annum. This was accompanied by an increase in current account deficits in excess of 3 per cent above what they had been in the previous decade. (See Khan and Knight, 1983, for a discussion; these authors find the terms-of-trade shocks the major cause of the deficits.) This has led to a renewal of interest in the effects of changes in terms of trade for a small open economy. The conventional wisdom, first put forward by Laursen and Metzler (1950) and Harberger (1950), emphasized the fact that a terms-of-trade worsening lowered real income, which in turn lowered savings and worsened the current account-the Laursen-Metzler Effect. The recent reappraisal was initiated by Obstfeld (1982). He showed, in an infinite-horizon-optimizing framework with perfect capital mobilizing, that if the discount rate was a function of the level of utility, surpluses, and not deficits, accompany an unanticipated and permanent terms-of-trade worsening. The long-run level of the discount rate is tied down by the given world rate of interest. This in turn fixes the long-run level of utility. The terms-of-trade shock tends to lower the level of utility and agents save to offset this. Across steady states there is only a substitution effect. On the other hand, if the discount rate is fixed and equal to the world interest rate, then the economy adjusts to the terms-of-trade shock by immediately lowering real expenditure by the same amount as the decline in real income so that the current account is always balanced. Svensson and Razin (1983) showed that in a two-period framework this does not necessarily happen. For the infinite-horizon case they showed that, if preferences were separable over time and the discount rate was increasing in instantaneous utility, then Obstfeld's results were indeed obtained. In a two-period overlapping-generations model, the results could be modified owing to the fact that human wealth and non-human wealth are not perfect substitutes and a terms-of-trade shock affects these differently. (See Matsuyama, 1988, for a discussion.) But it is still true that an unanticipated permanent terms-of-trade shock has a one-shot effect on the current account unless some ad hoc costs of adjustment are introduced (see e.g. Persson and Svensson, 1985, and Matsuyama, 1988). The uncertain lifetime model (see e.g. Frenkel and Razin, 1988, and Matsuyama, 1987) generates non-trivial

Current Wealth and Tenure Choice

This paper argues that a central implication of tenure transition models is that the timing of a household's initial switch to ownership is particularly dependent upon its current net worth. In contrast, permanent income, largely derived from human capital, is assumed to be the dominant component of the relevant household budget constraint in conventional tenure choice models. These contending propositions are tested using a Canadian micro database. Consistent with the tenure transition approach, current nonhuman wealth is found to have the primary budgetary role in tenure mode decisions of young households.

Consumption, wealth, and the real rate of interest: A reexamination

We develop a model of intertemporal choice which relates consumption to the interest rate, the inflation rate, and personal wealth. By utilizing labor income and nonhuman wealth to approximate personal wealth and by incorporating an adjustment process, we are able to derive an estimable relationship between consumption, the real rate of interest, and our approximation of personal wealth. Based on estimates we conclude that the real rate of interest has a very small and statistically insignificant effect on consumption-savings decisions. We then contrast our results with the results of previous studies.

Some applications of a model of term life insurance contracts

Abstract In this note, I have shown how economically meaningful propositions can be derived regarding the effects of human wealth, nonhuman wealth and the probability of dying on the optimal term life insurance coverage of an individual with state dependent preferences in the framework of Babbel & Economides (1985).

Borrowing Constraints and Aggregate Economic Activity

A model of aggregate economic activity is formulated which enmphasizes the effects of borrowing constraints in the presence of uninsurable risk. An important determinant of current income level is shown to be the cross-sectional distribution of wealth. As this distribution evolves endogenously, the model is capable of producing rich dynamics from a simple specification of exogenous shocks. The model shows that this phenomena can contribute to observed price volatility. IT IS COMMONLY THOUGHT that individuals have only limited opportunities to borrow against future labor income and cannot totally insure all types of risk. It has also been suggested that such departures from the presumptive norm of frictionless, complete information capital markets may have implications for aggregate economic activity. AlthLough there has been some work analyzing the implications of borrowing constraints for individual savings behavior (18, 2, 8), there has been no systematic analysis of how such borrowing constraints will affect the time series properties of output, prices, and interest rates. In this paper, we present a completely specified infinitely lived two agent equilibrium model which emphasizes the roles of borrowing constraint and uninsured risk for affecting aggregate outcomes. Specifically we assume that agents are prohibited from ever having negative nonhuman wealth. The model has the central feature that there is no aggregate uncertainty, but each agent's own productive opportunities are stochastic. If there were a full set of Arrow- Debreu contingent claim markets each agent could attain a certain consumption stream and the resulting allocation and (implicit) relative prices would be constant through time. However, we assume that such markets do not exist. Rather, we assume that at each point in time agents may trade only the single durable asset for the single perishable consumption good. This may be interpreted either as fiat mon ay with a fixed own nominal return of zero, or as claims to productive capital which emits a fixed exogenous flow of the consumption good. We assume also that output may be produced by labor. However, only one of the two agents is productive at any instant in time. The duration of time over which a single agent is productive is assumed to be random, and, for analytical simplicity, is assumed to be generated by a Poisson counting process. The resulting allocation has the property that the agent who is not productive exchanges some of his

Permanent income, hedonic prices, and demand for housing: New evidence

Housing demand is examined by looking quite specifically at the income and price variables based on individual household data. Permanent and transitory incomes are computed through instrumental variables related to human and nonhuman wealth. A price is constructed by spatially varying hedonic techniques. Separation of measured income into permanent and transitory components substantially improves the predictive power of the housing demand estimation and leads to demand elasticities of +1 and −1 with respect to permanent income and price. The permanent income elasticity is roughly twice the measured income elasticity.

Role of Wealth in Consumption: An Empirical Investigation

THE primary purpose of this work is to conduct an empirical investigation concerning the role of in consumption, and to test a few postulates of the wealth theories of consumption. The opportunity for such an investigation is provided by the recent publication by Kendrick (1976) of annual data on human and nonhuihan for the United States for the period 1929-69. Specifically, the paper (a) provides estimates of a consumption function in which a variable is included in addition to the income variable; (b) compares the responses of consumption expenditures to changes in human and nonhuman and tests empirically Friedman's hypothesis (1957, p. 17) regarding the effect on consumption of an increase in nonhuman relative to total wealth; and (c) throws some light on the stock adjustment' and habit persistence' postulates by reporting estimates for equations in which a lagged consumption term is added to the variables. The organization of the paper follows the aspects stated above. After a discussion of some methodological questions, we provide estimates of the parameters of consumption functions that include as a distinct variable in addition to income, and show that the variable has significant coefficients, and the coefficients look plausible. The income variable coefficients are substantial, and while being consistent with the life cycle' hypothesis are not necessarily inconsistent with Friedman's theory. Next, we discuss the separate effects of human and nonhuman on consumption. The evidence seems to favor Friedman's postulate that an increase in nonhuman wealth, relative to the total, increases consumption. Estimation of separate equations for (a) durable goods and (b) nondurables and services, by including a lagged consumption term in addition to the variables, suggests that the coefficient pattern can be interpreted as indicative of a stronger habit formation' effect for nondurables and services than for durables. A summarizing section concludes the paper.

Human and Nonhuman Wealth in Demand-for-Money Functions

Using Kendrick's recently published data on human and nonhuman wealth in the United States, log-linear money demand functions of the "partial adjustment" variety are estimated by introducing in each nonhuman, total, or human wealth as the scale or the "constraint" variable. It is found that the long-run elasticity of money demand with respect to nonhuman wealth is somewhat larger than that with respect to total wealth, and the elasticity with respect to human wealth is the lowest. Such a structure in the elasticities is observed consistently, although differences between the elasticities are not large and perhaps not statistically significant.

Consumer Horizon: Reconsidered

and Simos 1977) tested several postulates of the Permanent Income Hypothesis (PIH) and estimated the time-series values of the factor of proportionality, k, along with the consumer subjective discount rate, r. In that paper we neglected to point out that the Christensen and Jorgenson data of total private wealth did not contain human capital stock. At the time that our study was undertaken no reliable data on human capital existed for the United States. However, recently, Kendrick (1976) has constructed a series on total private wealth that contains human and nonhuman wealth. Using expanded concept of wealth, note attempts to make further estimates of r and k that are supplemental to our original findings. These estimates confirm our main conclusions regarding the validity of the PIH even when an expanded concept of wealth is used. Using the varying-parameter regression technique, we present two sets of time-series estimates of r. The first set of estimates of r, column 2, table 1, are based on the broadest definition of total private wealth, W1, that includes human and nonhuman tangibles and intangibles (Kendrick 1976, pp. 202-3). The consumer subjective discount rate based on definition of wealth varies from a low of 0.1 1 in 1932-33 to a high of 0.19 in 1943-45. The corresponding consumer horizon 1 r, ranges from 9.1 years, during the depression, to 5.3 years for the war years. These values of r are consistently lower than our original findings. However, there is a strong disagreement regarding the inclusion of human tangibles as parts of human wealth (Bowman 1962; Sharma and Ram 1974). Human tangible wealth refers to estimates of human investment or capital to produce physical human beings. More specifically, this category embraces the portion of personal consumption expenditures allocated to

Long-Run Effects of Debt versus Tax Financing

This paper reexamines Modigliani's remits of the long effects of an increment in public debt to finance a tax reduction or arising from a free distribution of government bonds Firstly, the effect of debt service on human and nonhuman wealth is introduced into the analysis. Secondly, it is shown that for the purpose of long-run debt analysis it is not legitimate to treat the cumulated change in saving as an equal change in net worth. This leads to a major correction of Modigliani's results.

OPTIMAL LIFE INSURANCE: COMMENT

The Journal of FinanceVolume 30, Issue 3 p. 904-908 Comment OPTIMAL LIFE INSURANCE: COMMENT Michael A. Klein, Michael A. Klein Associate Professor of Economics, Indiana University. The final version of this paper has benefited from the comments of Peter Fortune.Search for more papers by this author Michael A. Klein, Michael A. Klein Associate Professor of Economics, Indiana University. The final version of this paper has benefited from the comments of Peter Fortune.Search for more papers by this author First published: June 1975 https://doi.org/10.1111/j.1540-6261.1975.tb01867.xCitations: 1 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume30, Issue3June 1975Pages 904-908 RelatedInformation

The Linearity Property in the Consumption Function: Estimation, Tests and Some Related Results

IN the literature of economic theory it is well known that in a steady state monetary economy, a rational consumer's excess demand for commodities is homogeneous of degree zero in prices, and Phelps in an earlier paper (1962), and Hakansson more recently (1970), have extended this theoretical result to a time-sequenced analysis, and have by way of a dynamic programming solution shown that the consumer's optimal strategy is reflected by a function that is linear and linearly homogeneous in real and real wealth.' When considered in a macro-economic context, this theoretical proposition is subject to empirical tests for a number of reasons. Intuitively, the world in which the consumer makes his spending decisions may not conform in every detail to the one that is delineated in the theoretical model. On the conceptual level, some more fundamental issues are involved. The notion of an optimal consumption strategy expounded by Phelps and Hakansson has its micro foundation in utility maximization. The important question is whether the consumption-savings choice should be posed as a utility maximization problem where wealth is not desired per se but only as a source of a permanent flow of income, or as one where wealth is treated as a part of the choice problem. The different approaches would lead to different strategies. This point has been demonstrated, although in a somewhat different context, by Levhari and Patinkin (1968).2 In addition, as Pesek and Saving (1967, chapter 10) have pointed out, the question whether human and non-human capitals are homogeneous or whether they are subject to the same capitalization rate also has important bearings on the result of the intertemporal utility maximization problem. For many empirical purposes, the use of a linear consumption function has several implications that are either highly restrictive or inconsistent with actual experience. For instance, a linear function implies that the wealth effect on the aggregate consumption is a constant over GNP cycles, independent of the general condition of the economy or the current incomewealth ratio. It also implies that and wealth (strictly speaking, non-property and the capitalized value of non-human wealth) are infinitely substitutable in terms of their influence on the consumption decision, an implication partially due to the assumption that human and non-human capitals are homogeneous. Thus, there seem to be sufficient reasons for looking into the linearity property more closely. This paper is intended for this purpose. In the sequel, the appropriate form of the per capita consumption function will be determined on the basis of actual data. In addition, two closely related questions, the liquid asset effect and the possible influence of public debt and outside money on consumption, will also be looked into. Received for publication December 4, 1973. Revision accepted for publication May 8, 1974. * I am indebted to Ronald G. Ehrenberg for his helpful comments on an earlier version of this paper, and to Alvin K. Klevorick for providing part of the data used in the estimation. I am also grateful to the referee for his comments which improved the paper considerably. Any remaining errors are, of course, solely my responsibility. 1 In both papers, optimal consumption is actually shown to be proportional to the amount of capital (debt) on hand, which is equivalent to the notion of consumer net worth, and to the present value of the stream of future nonproperty income, which may be compared to the notion of expected income under the Ando-Brumberg-Modigliani life-cycle hypothesis. See in particular equations (6.3) and (6.5) in Phelps (1962), and equation (23) in Hakansson (1970). The reader is also referred to p. 737 of Phelps' paper, and pp. 601-602 of Hakansson's paper, op. cit., for their comments on the analytical properties of the optimal consumption strategy. 2 Although their theory deals primarily with money, the essence of the argument is retained when the role which assumes in their model is extended to wealth. See, for instance, equation (70) in the Levhari-Patinkin paper (1968, p. 748).

A CROSS SECTION STUDY OF THE DEMAND FOR MONEY: THE UNITED STATES, 1960–62

A BRIEF SURVEY is made of eight previous cross section studies of the demand for money. This is followed by a replication with U.S. data of a 1945 Czechoslovakian cross section study which concluded that wealth and not income was the determining variable in the money demand function. The U.S. data, which consists of the 1960-62 reinterview Survey of Consumer Finances (SCF), indicates that income is more important than nonhuman wealth. A regional interest rate variable and indicators of human wealth (age, family size, education, race, occupation, and place of residence) are added to the regression with a resulting increase in explanatory power. The extent of various biases-understatement of balances bias, omission of currency bias, and panel bias-is examined and the biases appear to offset each other. Since four years of income data are available for each of the 1057 spending units interviewed in the SCF panel study, a distributed lag approximation of permanent income is formed and is found to be more significant than current measured income. The final set of regressions includes income, regional interest rate, and indicators of both human and nonhuman wealth. The two rival models are the absolute income-wealth hypothesis and the permanent income hypothesis according to which money is a consumer durable which is uncorrelated with transitory income and which depends on permanent rather than current income. The findings of the present study suggest a confirmation of the permanent income hypothesis.