WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

ABSTRACT
The author develops a measure of aggregate private sector wealth in
Canada and examines its ability to explain aggregate consumption of nondurables
and services. This wealth measure includes financial, physical
and human wealth.
The author measures human wealth as the expected present value
of aggregate labour income, net of government expenditures, based on a
discrete state-space approximation of an estimated bivariate vector autoregression
for the real interest rate and the growth rate of labour income, net
of government expenditures. His general approach to measuring financial
and physical (non-human) wealth is to consolidate the assets and liabilities
of the various sectors of the economy so as to measure the net worth of the
ultimate owners of private-sector wealth – households. To the extent possible,
the author measures non-human wealth at market value.
The relationship between consumption and wealth is explored as a
means both of gauging the usefulness of the wealth measures developed in
this report and of improving on empirical consumption models for
Canada. The principal empirical finding is that both wealth and disposable
income are important determinants of consumption. Including wealth in
the consumption function is particularly helpful in explaining the consumption
boom of the late 1980s.
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