Modeling Wealth Effect in Consumption Function Based on System of National Accounts (SNA) Data
Modeling Wealth Effect in Consumption Function Based on System of National Accounts (SNA) Data

Summary/Abstract: The study explores the influence of housing wealth, as well as other wealth variables, on consumption in the frame of life cycle-permanent income theory. The sample consists of three former socialist countries and the model used was based on models initially developed for advanced economies, most notably Norway and the Netherlands. The paper, based, where necessary, on a compiled data set, uses a more complete list of variables than similar studies and relies on comparative analysis to come to plausible results and interpret them. The results differ from those obtained in other studies for the same or similar type of countries or even the same economies, and that is that movements in value of housing stock do not influence consumption of households. In addition, the paper explains why housing wealth is not part of consumption function in former socialist countries with certain macroeconomic structure, and that is low part of unpaid mortgage debt in the financing structure of housing wealth. The reason is that mortgage financing causes the price movements of housing wealth to influence consumption, especially in developed countries where workforce is highly mobile and financial innovations are present and mortgage financing dominates housing stock.

• Details
• Contents