Skip to main content

How Reliable are Cointegration-Based Estimates for Wealth Effects on Consumption? Evidence from Switzerland

Summary

According to economie theory, the intertemporal budget constraint of households implies that a permanent increase in wealth should have a positive effect on consumer spending. Given the comparatively strong increase in Swiss household wealth over the past few years, the question of the extent to which changes in wealth influence expenditures of households has become of special interest for Switzerland. In this paper, I show that while the link among consumption, wealth and income was quite strong from 1981 to 2000, it has been very unstable since 2001. This fact suggests that the gap among the three variables, i.e., the deviation from long-run equilibrium, that has opened over the last few years is less likely to close. The results apply to aggregate wealth effects as well as to separate financial and housing wealth effects. Furthermore, I document several fragility issues related to the use of the cointegration approach to estimating wealth effects. These issues highlight the importance of carefully checking the robustness of the results, instead of looking just at one cointegration estimation method and only one time period. They also highlight the need for a non-cointegration approach to estimating wealth effects.

References

  1. Afonso, A., and R. Sousa (2011), “Consumption, Wealth, Stock and Government Bond Returns: International Evidence,” The Manchester School, 79.

    Google Scholar 

  2. Ando, A., and F. Modigliani (1963), “The ‘Life-Cycle’ Hypothesis of Saving: Aggregate Implications and Tests,” American Economie Review, 53.

    Google Scholar 

  3. Aron, J., J.V. Duca, J. Muellbauer, K. Murata, and A. Murphy (2011), “Credit, Housing Collateral, and Consumption: Evidence from Japan, the U.K., and the U.S.,” Review of Income and Wealth, 58.

    Google Scholar 

  4. Aron, J., J. Muellbauer, and A. Murphy (2008), “Housing Wealth, Credit Conditions and Uk Consumption,” 2008 European Meeting of the Econometrie Society, Milan, Italy, August 27–31, 2008.

    Google Scholar 

  5. Attfield, C, and J. R. Temple (2010), “Balanced Growth and the Great Ratios: New Evidence for the US and UK,” Journal of Macroeconomics, 32, pp. 937–956.

    Article  Google Scholar 

  6. Bachmann, R., T. O. Berg, and E. R. Sims (2015), “Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence,” American Economie Journal: Economie Policy, 7, pp. 1–35.

    Google Scholar 

  7. Bai, J. (1994), “Least Squares Estimation of a Shift in Linear Processes,” Journal of Time Series Analysis, 15.

    Google Scholar 

  8. Bai, J., and P. Perron (1998), “Estimating and Testing Linear Models with Multiple Structural Changes,” Econometrica, 66, pp. 47–78.

    Article  Google Scholar 

  9. Bai, J., and P. Perron (2003), “Computation and Analysis of Multiple Structural Change Models,” Journal of Applied Econometrics, 18, pp. 1–22.

    Article  Google Scholar 

  10. Blinder, A. S., and A. Deaton (1985), “The Time Series Consumption Function Revisited,” Brookings Papers on Economie Activity.

    Google Scholar 

  11. Browne, F., T. Conefrey, and G. Kennedy (2013), “Understanding Irish House Price Movements — A User Cost of Capital Approach,” Central Bank oflreland Technical Paper.

    Google Scholar 

  12. Brumberg, R. H., and F. Modigliani (1954), “Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data,” in Post-Keynesian Economics, ed. by K. K. Kurihara, pp. 388–436, New Bunswick, NJ. Rutgers University Press.

    Google Scholar 

  13. Buiter, Wh. (2008), “Housing Wealth Isn’t Wealth,” Nber Working Paper Series, 14204.

    Google Scholar 

  14. Campbell, J.Y. (1996), “Understanding Risk and Return,” Journal of Political Economy, 104, pp. 298–345.

    Article  Google Scholar 

  15. Campbell, J. Y., and N. G. Mankiw (1989), “Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence,” Nber Macroeconomics Annual, 4.

    Google Scholar 

  16. Carrion-I-Silvestre, J. L., and A. Sanso (2006), “Testing the Null of Cointegration with Structural Breaks,” Oxford Bulletin of Economics and Statistics, 68.

    Google Scholar 

  17. Carroll, C. D. (2000), “Requiem for the Representative Consumer? Aggregate Implications of Microeconomic Consumption Behavior,” American Economie Review, 90 (2), pp. 110–115.

    Article  Google Scholar 

  18. Carroll, C.D., M. Otsuka, and J. Slacalek (2011), “How Large Are Housing and Financial Wealth Effects? A New Approach,” Journal of Money, Credit and Banking, 43.

    Google Scholar 

  19. Congressional Budget Office (2007), “Housing Wealth and Consumer Spending,” Background Papers.

    Google Scholar 

  20. Cooper, D., and K. Dynan (2014), “Wealth Effects and Macroeconomic Dynamics,” Journal of Economie Surveys.

    Google Scholar 

  21. Doepke, M., and M. Schneider (2006), “Inflation and Redistribution of Nominal Wealth,” Journal of Political E, 114(5).

    Google Scholar 

  22. Drehmann, M., and M. Juselius (2012), “Do Debt Service Costs Affect Macroeconomic and Financial Stability?,” BIS Quarterly Review.

    Google Scholar 

  23. Fisher, L.A., and G.M. Voss (2004), “Consumption, Wealth and Expected Stock Returns in Australia,” The Economie Record, 80, 359–372.

    Article  Google Scholar 

  24. Friedman, M. (1957), A Theory of the Consumption Function. National Bureau of Economie Research, Cambridge, MA.

    Google Scholar 

  25. Galli, A. (2016a), “How Reliable are Cointegration-Based Estimates for Wealth Effects on Consumption? Evidence from Switzerland,” SNB Working Paper Series, 2016–03.

    Google Scholar 

  26. Galli, A. (2016b), “Sticky Expectations and Wealth Effects on Consumption in Switzerland,” SNB Working Paper Series, 2016–14.

    Google Scholar 

  27. Hahn, J., and H. Lee (2001), “On the Estimation of the Consumption-Wealth Ratio: Cointegrating Parameter Instability and its Implications for Stock Return Forecasting,” Working paper, University of Washington.

    Google Scholar 

  28. Hahn, J., and H. Lee (2006), “Interpreting the Predictive Power of the Consumption-Wealth Ratio,” Journal of Empirical Finance, 13, pp. 183–202.

    Article  Google Scholar 

  29. Hamburg, B., M. Hoffmann, and J. Keller (2008), “Consumption, wealth and business cycles in Germany,” Empirical Economics, 34, 481–476.

    Article  Google Scholar 

  30. Haug, A.A., A. Beyer, and W Dewald (2011), “Structural Breaks and the Fisher Effect,” The B.E. Journal of Macroeconomics, 11.

    Google Scholar 

  31. Hoffmann, M. (2006), “Balanced Growth and Empirical Proxies of the Consumption-Wealth Ratio,” Technical Report / Universitäit Dortmund, SFB 475, (26).

    Google Scholar 

  32. Johansen, S. (1988), “Statistical Analysis of Cointegration Vectors,” Journal of Economie Dynamics and Control, 12, pp. 231–254.

    Article  Google Scholar 

  33. Kurozumi, E. (2002), “Testing for Stationarity with a Break,” Journal of Econometrics, 108, 63–99.

    Article  Google Scholar 

  34. Lettau, M., and S. Ludvigson (2001), “Consumption, Aggregate Wealth, and Expected Stock Returns,” The Journal of Finance, 56.

    Google Scholar 

  35. Lettau, M., and S. Ludvigson (2004), “Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption,” American Economie Review, 94.

    Google Scholar 

  36. Lettau, M., and S. Ludvigson (2011), “Shocks and Crashes,” Nber Working Paper Series, 16996.

    Google Scholar 

  37. Ludvigson, S., and C. Steindel (1999), “How Important is the Stock Market Effect on Consumption?,” Frbnyeconomie Policy Review.

    Google Scholar 

  38. Muellbauer, J. N. (2007), Housing, Credit and Consumer Expenditure. Jackson Hole Symposium, Federal Reserve Bank of Kansas City.

    Google Scholar 

  39. Nitschka, T. (2010), “International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets,” German Economie Review, 11.

    Google Scholar 

  40. Phillips, P. C. B., and M. Loretan (1991), “Estimating Long-Run Economie Equilibria,” Review of Economie Studies, 58, pp. 407–436.

    Article  Google Scholar 

  41. Poterba, J. M. (2000), “Stock Market Wealth and Consumption,” Journal of Economie Perspectives, 14, pp. 99–118.

    Article  Google Scholar 

  42. Romer, D. (2005), AdvancedMacroeconomics. McGraw-Hill/ Irwin, 3 edn.

    Google Scholar 

  43. Rosenblatt-Wisch, R., and R. Scheufele (2015), “Quantification and Characteristics of Household Inflation Expectations in Switzerland,” Applied Economics, 47(26), pp. 2699–2716.

    Article  Google Scholar 

  44. Rudd, J., and K. Whelan (2006), “Empirical Proxies for the Consumption-Wealth Ratio,” Review of Economie Dynamics, 9, pp. 34–51.

    Article  Google Scholar 

  45. Schmid, F. (2013), “Wealth Effects on Consumption in Switzerland,” Swiss Journal of Economics and Statistics, 149, pp. 87–110.

    Article  Google Scholar 

  46. Slacalek, J. (2009), “What Drives Personal Consumption? The Role of Housing and Financial Wealth,” The B.E. Journal of Macroeconomics, 9.

    Google Scholar 

  47. Sousa, R.M. (2010a), “Consumption, (Dis)Aggregate Wealth, and Asset Returns,” Journal of Empirical Finance, 21.

    Google Scholar 

  48. Sousa, R. M. (2010b), “Wealth Effects on Consumption: Evidence from the Euro Area,” Bank and Bank Systems, 7.

    Google Scholar 

  49. Stock, J. H., and M. W. Watson (1993), “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems,” Econometrica, 61, pp. 783–820.

    Article  Google Scholar 

  50. Swiss National Bank (2012), ”Household Wealth 2012,” http://www.snb.ch url/en/iabout/stat/statpub/vph/stats/wph.

    Google Scholar 

  51. Zhou, S. (2000), “Testing Structural Hypotheses on Cointegration Relations with Small Samples,” Economic inquiry, 38, pp. 629–640.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Alain Galli.

Additional information

I want to thank Gregor Bäurle, Pascal Gantenbein, Mathias Hoffmann, Katarina Juselius, Mico Loretan, Matthias Lutz, Massimiliano Marcellino, John Muellbauer, Klaus Neusser, Thomas Nitschka, Rolf Scheufele, Frank Schmid, Mark Watson, three anonymous referees, and seminar participants at the 2015 OeNB-BuBa-SNB workshop for valuable comments. The views expressed in this paper are those of the author and not necessarily those of the Swiss National Bank.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Galli, A. How Reliable are Cointegration-Based Estimates for Wealth Effects on Consumption? Evidence from Switzerland. Swiss J Economics Statistics 153, 437–479 (2017). https://doi.org/10.1007/BF03399514

Download citation

  • JEL classification
  • D12
  • E21
  • E44

Keywords

  • Wealth effects
  • consumption-to-wealth ratio
  • cointegration
  • cay residual