Revisiting the Consumption-Wealth Nexus: A Nonparametric Exploration
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Abstract
This study investigates the relationship between non-durable consumption and asset prices in 12 developed and 11 emerging economies, members of the European Union, emphasising the presence of nonlinearities through a nonparametric framework. Utilising the Categorical Regression Splines (CRS) approach, the analysis challenges traditional parametric models by allowing data to dictate the functional form of the relationship. The findings reveal distinct consumption-wealth dynamics: income remains the key driver in the emerging economies sample, with stock market fluctuations exhibiting potentially non-linear effects. Furthermore, consumption is primarily income-driven, with housing wealth playing a more pronounced role due to less-developed mortgage and financial markets in these emerging economies. Money wealth effects vary in significance, depending on the economic context and time period. These results underscore the advantages of nonparametric methods in accurately capturing complex economic relationships, providing insights for policymakers in designing effective strategies to support household consumption and economic stability.
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References
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Mallick, S. K., & Mohsin, M. (2010). On the real effects of inflation in open economies: Theory and empirics. Empirical Economics, 39(3), 643–673. https://doi.org/10.1007/s00181-009-0328-0
Mehra, Y. P. (2001). The wealth effect in empirical life-cycle aggregate consumption equations. FRB Richmond Economic Quarterly, 87(2), 45–68.
Nagel, S. (2016). The liquidity premium of near-money assets. The Quarterly Journal of Economics, 131(4), 1927-1971. https://doi.org/10.1093/qje/qjw028
Nicolau, M. (2020). Interest rate and the financial and housing wealth effects in ten CEEC. Economics Bulletin, 40(2), 1132–1145.
Paiella, M., & Pistaferri, L. (2017). Decomposing the wealth effect on consumption. Review of Economics and Statistics, 99(4), 710–721. https://doi.org/10.1162/REST_a_00629
Peltonen, T. A., Sousa, R. M., & Vansteenkiste, I. S. (2012). Wealth effects in emerging market economies. International Review of Economics and Finance, 24, 155–166. https://doi.org/10.1016/j.iref.2012.01.006
Racine, J. S., & Nie, Z. (2011). CRS: categorical regression splines. R package Version 0.15-11. Available at: https://cran.r-project.org/web/packages/crs/crs.pdf
Rodil-Marzabal, O., & Menezes-Ferreira-Junior, V. (2016). The wealth effect in the eurozone. Panoeconomicus, 63(1), 87–112. https://doi.org/10.2298/PAN1601087R
Singh, B. (2022). Housing and stock market wealth effects in developing economies. International Economics and Economic Policy, 19(1), 29–49. https://doi.org/10.1007/s10368-021-00510-9
Sousa, R. M. (2009). Wealth effects on consumption: Evidence from the euro area. European Central Bank (ECB). Available at: https://www.econstor.eu/handle/10419/153484
Vizek, M. (2013). The influence of stock market and housing wealth on consumption expenditures in transition countries. Research in Economics and Business: Central and Eastern Europe, 3(1), 49-62.
Aruoba, S. B., Elul, R., & Kalemli-Ozcan, S¸. (2022). Housing wealth and consumption: The role of heterogeneous credit constraints. FRB of Philadelphia Working Paper. https://doi.org/10.21799/frbp.wp.2022.34
Aruoba, S., Elul, R., & Kalemli-Ozcan, S. (2019). How big is the wealth effect? Decomposing the response of consumption to house prices. FRB of Philadelphia Working Paper. https://doi.org/10.21799/frbp.wp.2019.06
Baker, S. R., & Yannelis, C. (2017). Income changes and consumption: Evidence from the 2013 federal government shutdown. Review of Economic Dynamics, 23, 99-124. https://doi.org/10.1016/j.red.2016.09.005
Bampinas, G., Konstantinou, P., & Panagiotidis, T. (2017). Inequality, demographics and the housing wealth effect: Panel quantile regression evidence for the US. Finance Research Letters, 23, 19–22. https://doi.org/10.1016/j.frl.2017.01.001
Bernard, J. T., Gavin, M., Khalaf, L., & Voia, M. (2015). Environmental Kuznets curve: Tipping points, uncertainty and weak identification. Environmental and Resource Economics, 60(2), 285-315. https://doi.org/10.1007/s10640-014-9767-y
Casni, A. C. (2016). Is there a housing wealth effect in European countries? Croatian Review of Economic, Business and Social Statistics, 2(2), 30–40. https://doi.org/10.1515/crebss2016-0011
Casni, A. C. (2018). The housing wealth effect before and after the 2008 financial crisis: Panel vector autoregression approach. Working Paper.
Catte, P., Girouard, N., Price, R., & Andre, C. (2004). Housing markets, wealth and the business cycle. OECD.
Ciarlone, A. (2011). Housing wealth effect in emerging economies. Emerging Markets Review, 12(4), 399–417. https://doi.org/10.1016/j.ememar.2011.06.003
Cloyne, J., Ferreira, C., & Surico, P. (2020). Monetary policy when households have debt: new evidence on the transmission mechanism. The Review of Economic Studies, 87(1), 102-129. https://doi.org/10.1093/restud/rdy074
Cocco, J. F., Gomes, F., & Lopes, P. (2020). Evidence on expectations of household finances. https://dx.doi.org/10.2139/ssrn.3362495
Coskun, Y., Apergis, N., & Alp Coskun, E. (2022). Nonlinear responses of consumption to wealth, income, and interest rate shocks. Empirical Economics, 63(3), 1293–1335. https://doi.org/10.1007/s00181-021-02171-8
de Bondt, G., Gieseck, A., Zekaite, Z., & Herrero, P. (2019). Disaggregate income and wealth effects in the largest euro area countries (tech. rep. No. 2343). ECB Working Paper. https://dx.doi.org/10.2139/ssrn.3515397
Funke, N. (2004). Is there a stock market wealth effect in emerging markets? Economics Letters, 83(3), 417–421. https://doi.org/10.1016/j.econlet.2003.12.002
Hall, R. E., & Mishkin, F. S. (1980). The sensitivity of consumption to transitory income: Estimates from panel data on households, NBER Working Paper. https://doi.org/10.3386/w0505
Jappelli, T., & Scognamiglio, A. (2018). Interest rate changes, mortgages, and consumption: evidence from Italy. Economic Policy, 33(94), 183-224. https://doi.org/10.1093/epolic/eiy001
Jawadi, F., & Sousa, R. M. (2014). The relationship between consumption and wealth: A quantile regression approach. Revue d’Economie Politique, 124(4), 639–652. https://doi.org/10.3917/redp.244.0639
Kaplan, G., Mitman, K., & Violante, G. L. (2020). Non-durable consumption and housing net worth in the great recession: Evidence from easily accessible data. Journal of Public Economics, 189, 104176. https://doi.org/10.1016/j.jpubeco.2020.104176
Lettau, M., & Ludvigson, S. C. (2004). Understanding trend and cycle in asset values: Reevaluating the wealth effect on consumption. American Economic Review, 94(1), 276-299. https://doi.org/10.1257/000282804322970805
Lo Duca, M., Koban, A., Basten, M., Bengtsson, E., Klaus, B., Kusmierczyk, P., Lang, J. H., Detken, C., & Peltonen, T. (2017). A new database for financial crises in European countries. European Central Bank Occasional Paper Series, No. 194/2017. https://dx.doi.org/10.2139/ssrn.4033022
Ma, S., & Racine, J. S. (2013). Additive regression splines with irrelevant categorical and continuous regressors. Statistica Sinica, 23, 515-541. https://www.jstor.org/stable/24310351
Mallick, S. K., & Mohsin, M. (2010). On the real effects of inflation in open economies: Theory and empirics. Empirical Economics, 39(3), 643–673. https://doi.org/10.1007/s00181-009-0328-0
Mehra, Y. P. (2001). The wealth effect in empirical life-cycle aggregate consumption equations. FRB Richmond Economic Quarterly, 87(2), 45–68.
Nagel, S. (2016). The liquidity premium of near-money assets. The Quarterly Journal of Economics, 131(4), 1927-1971. https://doi.org/10.1093/qje/qjw028
Nicolau, M. (2020). Interest rate and the financial and housing wealth effects in ten CEEC. Economics Bulletin, 40(2), 1132–1145.
Paiella, M., & Pistaferri, L. (2017). Decomposing the wealth effect on consumption. Review of Economics and Statistics, 99(4), 710–721. https://doi.org/10.1162/REST_a_00629
Peltonen, T. A., Sousa, R. M., & Vansteenkiste, I. S. (2012). Wealth effects in emerging market economies. International Review of Economics and Finance, 24, 155–166. https://doi.org/10.1016/j.iref.2012.01.006
Racine, J. S., & Nie, Z. (2011). CRS: categorical regression splines. R package Version 0.15-11. Available at: https://cran.r-project.org/web/packages/crs/crs.pdf
Rodil-Marzabal, O., & Menezes-Ferreira-Junior, V. (2016). The wealth effect in the eurozone. Panoeconomicus, 63(1), 87–112. https://doi.org/10.2298/PAN1601087R
Singh, B. (2022). Housing and stock market wealth effects in developing economies. International Economics and Economic Policy, 19(1), 29–49. https://doi.org/10.1007/s10368-021-00510-9
Sousa, R. M. (2009). Wealth effects on consumption: Evidence from the euro area. European Central Bank (ECB). Available at: https://www.econstor.eu/handle/10419/153484
Vizek, M. (2013). The influence of stock market and housing wealth on consumption expenditures in transition countries. Research in Economics and Business: Central and Eastern Europe, 3(1), 49-62.