WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

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functions further, by augmenting a standard EC consumption model with
wealth, this analysis succeeds both in placing empirical consumption models
for Canada on a firmer theoretical foundation and in improving our
ability to explain observed consumption behaviour.
On a broader level, the usefulness of wealth explaining consumption
suggests that the measures of wealth developed in this report may be
useful in other applications. These include the impact of public policy on
consumption and saving, and the effect of fluctuations in asset prices on
aggregate demand and inflation.
The evidence that aggregate consumption and saving respond differently
to different components of non-human wealth also suggests that
distributional issues deserve more attention. In principle, heterogeneity in
consumer portfolios could be addressed by disaggregating consumers into
various groups, but this approach is hampered by the lack of adequate
data. An alternative is to disaggregate non-human wealth into its principal
components and examine the sensitivity of these individual components to
aggregate consumption.
Evidence that consumption is influenced by the composition of
wealth may also indicate that adjustment costs associated with portfolio
allocation differ across assets. In the absence of separation between the
portfolio-choice and consumption-savings problems, an integrated
approach to modelling wealth allocation and consumption behaviour is
appropriate. These and other extensions, however, are left for future work.