Following Friedman’s permanent income hypothesis and Ando and Modigliani’s lifecycle hypothesis, this paper empirically studies the role of house prices and income in determining the dynamic behaviour of consumption in selected European post-transition economies using the panel vector autoregression (PVAR) approach and quarterly data covering the period from the first quarter of 2002 until the second quarter of 2012. With the shocks being recognized using the customary recursive identification scheme, we found that the response of personal consumption to the housing wealth shock is initially positive, but short lived.
If the inline PDF is not rendering correctly, you can download the PDF file here.
Aben, M., Kukk, M., & Staehr, K. (2012). Housing equity withdrawal and consumption dynamics in Estonia 2002-2011. Research in Economics and Business: Central and Eastern Europe, 4, 19-40.
Abrigo, M. R. M., & Love, I. (2015). Estimation of panel vector autoregression in stata: A package of programs. Retrieved from http://paneldataconference2015.ceu.hu/Program/Michael-Abrigo.pdf
Ahec Šonje, A., Čeh Časni, A., & Vizek, M. (2012). Does housing wealth affect private consumption in European post transition countries? Evidence from linear and threshold models. Post-communist Economies, 24, 73-85. https://doi.org/10.1080/14631377.2012.647629
Ahec Šonje, A., Čeh Časni, A., & Vizek, M. (2014). The effect of housing and stock market wealth on consumption in emerging and developed countries. Economic Systems, 38(3), 433-450. https://doi.org/10.1016/j.ecosys.2014.03.001
Ando, A., & Modigliani, F. (1963). The ‘life-cycle’ hypothesis of saving: Aggregate implications and test. The American Economic Review, 53, 55-84.
Andre, C., Gupta, R., & Kanda, P. T. (2011). Do house prices impact consumption and interest rate? Evidence from OECD countries using an agnostic identification procedure (Working Paper Series No. 201118). Pretoria, South Africa: Department of Economics, University of Pretoria.
Andrews, D. W. K., & Lu, B. (2001). Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models. Journal of Econometrics, 101(81), 123-164. https://doi.org/10.1016/S0304-4076(00)00077-4
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error component models. Journal of Econometrics, 68, 29-51. https://doi.org/10.1016/0304-4076(94)01642-D
Bayoumi, T., & Edison, H. (2003). Is wealth increasingly driving consumption? DNB Staff Reports, 101.
Belsky, E., & Prakken, J. (2004). Housing wealth effects: Housing’s impact on wealth accumulation, wealth distribution and consumer spending (Working Paper W04-13). Cambridge: Joint Centre for Housing Studies.
Bertaut, C. C. (2002). Equity prices, household wealth, and consumption growth in foreign industrial countries: Wealth effects in the 1990s. International Finance Discussion Papers, 724. https://doi.org/10.2139/ssrn.307800
Carroll, D. C., Otsuka, M., & Slacalek, J. (2006). How large is the housing wealth effect? A new approach (Working Paper No. 12746). Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w12746
Case, K., Quigley, J., & Shiller, R. (2005). Comparing wealth effects: the stock market versus the housing market. The B.E. Journal of Macroeconomics, 5, 1-32. https://doi.org/10.2202/1534-6013.1235
Čeh Časni, A. (2014). Housing wealth effect on personal consumption: Empirical evidence from European post-transition economies. Czech Journal of Economics and Finance, 64(5), 392-406.
Čeh Časni, A., & Vizek, M. (2014). Interactions between real estate and equity markets: An investigation of linkages in developed and emerging countries. Czech Journal of Economics and Finance, 64(2), 100-119.
Ciarlone, A. (2011). Housing wealth effect in emerging economies. Emerging Markets Review, 12, 399-417. https://doi.org/10.1016/j.ememar.2011.06.003
Cochrane, J. H. (1994). Permanent and transitory components of GNP and stock prices. Quarterly Journal of Economics, 109, 241-265. https://doi.org/10.2307/2118434
Dvornak, N., & Kohler, M. (2003). Housing wealth, stock market wealth and consumption: A panel analysis for Australia (Research Discussion Paper No. 2003-07). Sydney Economic Research Department, Reserve Bank of Australia.
Fisher, L., & Voss, G. (2001). Consumption, wealth and expected returns in Australia. Economic Record, 80, 359-372. https://doi.org/10.1111/j.1475-4932.2004.00194.x
Friedman, M. (1957). A theory of the consumption function. New York: Princeton, Princeton University Press.
Girouard, N. & Blöndal, S. (2001). House Prices and Economic Activity, OECD Economics Department Working Papers 279, OECD Publishing.
Hamilton, J. D. (1994). Time series analysis. Princeton: Princeton University Press.
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50(4), 1029-1210. https://doi.org/10.2307/1912775
Hood, C. C. (2002, April). Comparing the automatic ARIMA model selection procedures of TRAMO and X-12-ARIMA version 0.3 and the seasonal adjustments of SEATS and X-12-ARIMA. Paper presented at the Eurostat Working Group on Seasonal Adjustment Meeting, Luxembourg.
Labhard, V., Sterne, G., & Young, C. (2005). The wealth effects on consumption in industrialized countries (Working Paper No. 275). London: Bank of England.
Larson, R., Lyhagen, J., & Løthgren, M. (2001). Likelihood based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109-142. https://doi.org/10.1111/1368-423X.00059
Larsson, R., & Lyhagen, J. (1999). Likelihood based inference in multivariate panel cointegration models (Working Paper). Stockholm, Sweden: Stockholm University.
Lettau, M., & Ludvigson, S. (2004). Understanding trend and cycle in asset values: Reevaluating the wealth effect on consumption. American Economic Review, 94, 276-299. https://doi.org/10.1257/000282804322970805
Love, I., & Zicchino, L. (2006). Financial development and dynamic investment behaviour: Evidence from panel VAR. The Quarterly Review of Economics and Finance, 46, 190-210. https://doi.org/10.1016/j.qref.2005.11.007
Ludwig, A., & Sløk, T. (2004). The relationship between stock prices, house prices and consumption in OECD countries. Topics in Macroeconomics, 4, Article 4. https://doi.org/10.2202/1534-5998.1114
Lutkepohl, H. (2005). New introduction to multiple time series analysis. New York: Springer. https://doi.org/10.1007/978-3-540-27752-1
Mehra, Y. P. (2001). The wealth effect in empirical life-cycle aggregate consumption equations. Federal Reserve Bank of Richmond Economic Quarterly, 87(2), 45-68.
Mishkin, F. S. (2007). Housing and the monetary transmission mechanism (Working Paper No. 13518). Cambridge: National Bureau of Economic Research. https://doi.org/10.3386/w13518
Neri, S. (2004). Monetary policy and stock prices (Working Paper No. 513). Rome: Bank of Italy.
Paiella, M. (2009). The stock market, housing, and consumer spending: A survey of evidence on wealth effect. Journal of Economic Surveys, 23, 947-973. https://doi.org/10.1111/j.1467-6419.2009.00595.x
Patelis, A. D. (1997). Stock return predictability and the role of monetary policy. Journal of Finance, 52(5), 1951-1972. https://doi.org/10.1111/j.1540-6261.1997.tb02747.x
Seč, R., & Zemčik, P. (2007). The impact of mortgages, house prices and rents on household consumption in the Czech Republic (CERGE-EI Discussion Paper No. 185). Praque: Center for Economic Research and Graduate Education, Charles University.
Simo-Kengne, B. D. (2012). The impact of house prices on consumption in South Africa: evidence from provincial-level panel VARs (Working Paper Series No 11). Pretoria, South Africa: Department of Economics, University of Pretoria.
Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48, 1-48. https://doi.org/10.2307/1912017
Sowell, T. (2009). Applied economics thinking beyond stage one. New York: Basic Books.
Thorbecke, W. (1997). On stock market returns and monetary policy. Journal of Finance, 52(2), 635-654. https://doi.org/10.1111/j.1540-6261.1997.tb04816.x