FINANCIAL LIBERALISATION, CONSUMPTION AND WEALTH EFFECTS IN SEVEN OECD COUNTRIES
| Author | E. Philip Davis,Ray Barrell |
| DOI | http://doi.org/10.1111/j.1467-9485.2007.00413.x |
| Published date | 01 May 2007 |
| Date | 01 May 2007 |
FINANCIAL LIBERALISATION,
CONSUMPTION AND WEALTH EFFECTS
INSEVENOECDCOUNTRIES
Ray Barrell
n
and E. Philip Davis
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Abstract
We estimate the impact of financial liberalisation on consumption in seven major
industrial countries, and find a marked shift in behaviour, notably a decline in
short-run income elasticities and a rise in short-run wealth and interest rate
elasticities. A corollary is that consumption equations estimated over both pre- and
post-liberalisation regimes may be misleading, and either a form of testing as
presented here or a shortening of the sample period may be appropriate for
accurate forecasting and simulation.
I Intro ductio n
We assess the impact of financial liberalisation on consumption for seven OECD
countries – the United States, the United Kingdom, Germany, France, Japan,
Canada and Sweden – utilising a dynamic error correction model featuring both
tangible and financial wealth, and allowing liberalisation to impact differentially
on the determinants of consumption in the short and long run. Our prior view is
that the removal of liquidity constraints during liberalisation may reduce the
response of consumption to real personal disposable income, and may boost
wealth effects correspondingly. Estimates of the significance of leveraged
dummies for liberalisation are consistent with these priors.
Consumption, wealth and liquidity constraints
We follow the tradition of empirical work based on the life cycle model, whereby
planned consumption is a function of both human and non-human wealth
(Deaton, 1992). A recent example is Davis and Palumbo’s (2001) study of the
United States consumption function, which attempted to determine whether
changes in wealth as well as income affect the growth rate of consumer spending.
Ludvigson and Steindel (1999) also examined wealth effects in a quarterly
n
NIESR
nn
NIESR and Brunel University
Scottish Journal of Political Economy, Vol. 54, No. 2, May 2007
r2007 The Authors
Journal compilation r2007 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
254
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