WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

Both estimators correct for the endogeneity bias that is likely to be
present in this application, given that the right-hand-side variables are
unlikely to be strictly exogenous, and both have the same asymptotic distributions.
In all but one case, the Phillips-Hansen estimator uses residuals
that are prewhitened with a VAR(1) to correct for serial correlation, since
the first-order VAR is sufficient to capture most of the serial correlation in
the residuals. The exception is the regression of c on y and p, which
required a second-order VAR.
The Stock-Watson procedure is implemented using leads and lags of
four quarters, and the reported standard errors are based on the Newey
and West (1987) procedure, since there is evidence of serially correlated
residuals. Four features of the results stand out.
First, the estimates for which valid standard errors are reported
indicate that both disposable income and wealth are significant determinants
of trend movements in consumption at any reasonable level of
significance. 7
Second, while including wealth among the right-hand-side variables
reduces the coefficient on disposable income considerably, disposable
income remains an important determinant of consumption. In the simple
Keynesian model, the coefficient on disposable income is always slightly
above 0.80; when wealth is added, this coefficient ranges from 0.45 to 0.65.
Third, almost all the explanatory power of wealth is coming from
the human wealth component – the coefficient on non-human wealth (k)
while positive, is small and within a standard error of zero. This finding is
consistent with the evidence that non-human wealth is I(0), and cannot
therefore explain the stochastic trend in consumption. Consumers,
cognizant of the fact that fluctuations in non-human wealth are temporary
7. In contrast, Beach, Boadway and Bruce’s measures of total, human and non-human
wealth were not found to be significant determinants of consumption of non-durables and
services when they were added to a Keynesian consumption function estimated on annual
data from 1964 to 1981 – the frequency and sample for which Beach, Boadway and Bruce’s
wealth measures are available.
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