Consumption and Wealth

Abstract

Two remarkable features of the Australian economy over recent years have been strong growth in private consumption expenditure and household wealth. This paper examines the relationship between consumption and wealth in an effort to better understand aggregate consumption behaviour. We find a reasonably robust steady-state relationship between non-durables consumption, labour income and aggregate household wealth for the period 1988:Q4–1999:Q3. Based upon this relationship, an increase in per capita wealth of one dollar is eventually associated with a rise in annual non-durables consumption of approximately four cents. We also find that changes in both non-financial and financial assets have significant effects on consumption. Above-trend growth of wealth in recent years has contributed significantly to growth in consumption over this time. A further noteworthy result concerns the recent demutualisations and share floats in Australia; perhaps surprisingly, we find no evidence that these events had a significant effect on consumption growth. Finally, we place our results within the broader empirical literature and examine whether they are consistent with standard economic theories of consumption.

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