Wealth and consumption: an assessment of the international evidence

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 September 2005

Working Paper No. 275
By Vincent Labhard, Gabriel Sterne and Chris Young

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.

PDFWealth and consumption: an assessment of the international evidence

Other papers

Was this page useful?
Add your details...