Advertisement

Revisiting Wealth Effects in France: A Double-Nonlinearity Approach

  • Olivier Damette
  • Fredj JawadiEmail author
Chapter
  • 24 Downloads
Part of the Dynamic Modeling and Econometrics in Economics and Finance book series (DMEF, volume 27)

Abstract

This paper investigates the relationship between French wealth and household consumption in a nonlinear context. At first, we update the previous French wealth effects estimates by taking into account the post subprime crisis period; we show that the wealth effect is still positive but only about 8%, rather than 13% suggesting that the wealth effect slightly decreased after the subprime crisis. In addition, unlike previous studies, we enable the wealth–consumption relationship to exhibit asymmetry, time variation and nonlinearity. To this end, we specify, on the one hand, two different threshold autoregressive models (TAR and MTAR) in order to reproduce nonlinear wealth effects in the short-term. On the other hand, we propose a time-varying cointegration specification to the consumption–wealth relationship in the long term. Interestingly, our specification enables the introduction of nonlinearity not only asymmetrical adjustment in the short run but also in the long-term relationship in order to capture different and complex forms of wealth effects. We show a significant wealth effect and find evidence of an unstable wealth–consumption relationship, particularly in 2000 and during the subprime crisis, suggesting an increase in the wealth effect during these periods.

References

  1. Alexandre, F., Baçao, P., & Gabriel, V. (2007). The consumption-wealth ratio under asymmetric adjustments. Studies in Nonlinear Dynamics and Econometrics, 12(4), 1–32.Google Scholar
  2. Altissimo, F., Georgiou, E., Sastre, T., Valderrama, M. T., Sterne, G., Stocker, M., Weth, M., Whelan, K., Willam, A. (2005). Wealth and asset price effects on economic activity. ECB occasional paper series, 29.Google Scholar
  3. Apergis, N., & Miller, S. (2006). Consumption asymmetry and the stock market: Empirical evidence. Economics Letters, 93, 337–342.CrossRefGoogle Scholar
  4. Arrondel, L., Lamarche, P., & Savignac, F. (2015). Wealth effects on consumption across the wealth distribution: Empirical evidence. Working Papers, 552, Banque de France.Google Scholar
  5. Barrell, R., & Davis, E. P. (2007). Financial liberalisation, consumption and wealth effects in seven OECD countries. Scottish Journal of Political Economy, 54(2), 254–267.CrossRefGoogle Scholar
  6. Barell, R., Costantini, M., & Meco, I. (2015). Housing wealth, financial wealth, and consumption: New evidence for UK and Italy. International Review of Financial Analysis, 42, 316–323.CrossRefGoogle Scholar
  7. Bierens, H., & Martins, L. (2010). Time varying cointegration. Econometric Theory, 26, 1453–1490.CrossRefGoogle Scholar
  8. Boone, L., Girouard, N., & Wanner, I. (2001). Financial market liberalisation, wealth and consumption. OECD Economics Department Working Papers, 308.Google Scholar
  9. Buiter, W. H. (2008). Housing wealth isn’t wealth. CEPR Discussion paper, 6920.Google Scholar
  10. Byrne, J. P., & Davis, E. P. (2003). Disaggregate wealth and aggregate consumption: An investigation of empirical relationships for the G7. Oxford Bulletin of Economics and Statistics, 65(2), 197–220.CrossRefGoogle Scholar
  11. Campbell, J. Y., & Mankiw, N. G. (1989). Consumption income and interest rates: Reinterpreting the time series evidence. NBER Macroeconomics Annual, 25(2), 185–216.CrossRefGoogle Scholar
  12. Carroll, C., Ostuka, M., & Slacalek, J. (2011a). How large are housing and financial wealth effects? A new approach. Journal of Money Credit and Banking, 43(1), 55–79.CrossRefGoogle Scholar
  13. Carroll, C. D., Slacalek, J., Sommer, M. (2011b). International evidence on sticky consumption growth. The Review of Economics and Statistics, MIT Press, 93(4), 1135–1145, November, 2011.Google Scholar
  14. Carroll, C. D., Slacalek, J., & Tokuoka, K. (2014). The distribution of wealth and the MPC: implications of new European data, American Economic Review, American Economic Association, 104, 5, 107–11, May, 2014.Google Scholar
  15. Case, K. E., Quigley, J. M., & Shiller, R. J. (2005). Comparing wealth effects: The stock market versus the housing market. Advances in Macroeconomics, 5(1), 1–32.Google Scholar
  16. Catte, P., Girouard, N., Price, R., & Andre, C. (2004). Housing markets, wealth and the business cycle. OECD Economics Department Working Papers, 394.Google Scholar
  17. Chauvin V., & Damette, O. (2010). Wealth effects on private consumption: the french case. In De Bandt et al. (Ed.) Housing Markets in Europe. A Macroeconomic Perspective (pp. 263–282), Springer.Google Scholar
  18. Chauvin, V., & Damette, O. (2011). Effets de richesse: le cas français. Economie et Statistique, 438–440, 111–141.Google Scholar
  19. Cochrane, J. H. (1994). Permanent and transitory components of GDP and stock prices. Quarterly Journal of Economics, 109(1), 241–265.Google Scholar
  20. Donihue M., & Avramenko, A. (2007). Decomposing consumer wealth effects: Evidence of the role of real estate assets following the wealth cycle of 1990–2002. The BE Journal of Macroeconomics, 7, article 25.Google Scholar
  21. Enders, W., & Siklos, P. L. (2001). Cointegration and threshold adjustment. Journal of Business & Economic Statistics, 19, 166–176.CrossRefGoogle Scholar
  22. European Commission. (2008). Wealth household consumption, what are the risks attached to falling house prices and high debt? European Commission, Quarterly Report on the Euro Area, III.Google Scholar
  23. Friedman M. (1957). A theory of the consumption function, Milton Friedman. Princeton: Princeton University Press.Google Scholar
  24. Forest, J. J., & Tuner, P. (2013). Alternative estimators of cointegrating parameters in models with nonstationary data: An application to US export demand. Applied Economics, 45, 629–636.CrossRefGoogle Scholar
  25. Gabriel, V., Alexandre, F., & Baçao, P. (2008). The consumption-wealth ratio under asymmetric adjustment. Studies in Nonlinear Dynamics and Econometrics, 12(4), 1–32.Google Scholar
  26. Gonzalo, J., & Ng, S. (2001). A systematic framework for analyzing the dynamic effects of permanent and transitory shocks. Journal of Economic Dynamics and Control, 25(10), 1527–1546.CrossRefGoogle Scholar
  27. IMF. (2004). Modelling consumption behavior. IMF Country Report, Selected Issues, 04/346, 6–18.Google Scholar
  28. Jawadi, F. (2008). Does Nonlinear Econometrics Confirm the Macroeconomic Models of Consumption? Economics Bulletin, 5(17), 1–11.Google Scholar
  29. Jawadi, F., & Léoni, P. (2013). Nonlinearity, cyclicity and persistence in consumption and income relationships: Research in honor of Melvin J. Hinich. Macroeconomic Dynamics, 16(S3), 376–393.CrossRefGoogle Scholar
  30. Jawadi, F., & Sousa, R. (2014). The relationship between consumption and wealth: A quantile regression approach. Revue d’Economie Politique, 124, 639–652.CrossRefGoogle Scholar
  31. Jawadi, F., Soparnot, R., & Sousa, R. (2015). Assessing financial and housing wealth effects through the lens of a nonlinear framework. Research in International Business and Finance.Google Scholar
  32. Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models. Econometrica, 59(6), 1551–1580.CrossRefGoogle Scholar
  33. Johansen, S. (1995). Likelihood-based inference in cointegrating vector autoregressive models. Oxford: Oxford University Press.CrossRefGoogle Scholar
  34. Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics, 112, 359–379.CrossRefGoogle Scholar
  35. Keynes, J. M. (1936). Théorie générale de l'emploi, de l'intérêt et de la monnaie (livres IV à VI).Google Scholar
  36. Lettau, M., & Ludvigson, S. (2001). Consumption, aggregate wealth, and expected stock returns. Journal of Finance, 56, 815–849.CrossRefGoogle Scholar
  37. Lettau, M., & Ludvigson, S. (2004). Understanding trend and cycle in asset values: Reevaluating the wealth effect on consumption. American Economic Review, 94(1), 276–299.CrossRefGoogle Scholar
  38. Marquez, E., Martinez-Canete, A. R., & Pérez-Soba, I. (2013). Wealth shocks, credit conditions and asymmetric consumption response: empirical evidence for the UK. Economic Modelling, 33, 357–366.CrossRefGoogle Scholar
  39. Mastrogiacomo, M. (2010). Testing consumers’ asymmetric perception of changes in household financial situation. Review of Income and Wealth, 56(2), 327–350.CrossRefGoogle Scholar
  40. Montalvo, J. G. (1995). Comparing cointegration regression estimators: Some additional Monte Carlo results. Economics Letters, 48, 229–234.CrossRefGoogle Scholar
  41. Muellbauer, J. (2008). Housing, credit and consumption expenditure. CEPR Discussion paper, 6782.Google Scholar
  42. Muellbauer, J., & Lattimore, R. (1995). The consumption function: A theoretical and empirical overview. In M. H. Pesaran & M. Wickens (Eds.), Handbook of applied econometrics: macroeconomics (pp. 221–311). Oxford: Blackwell.Google Scholar
  43. Nan-Kuang, C. A., Shiu-sheng Chen, A., & Yu-Hsi, C. (2010). House prices, collateral constraint, and the asymmetric effect on consumption. Journal of Housing Economics, 19, 26–37.CrossRefGoogle Scholar
  44. Rudd, J., & Whelan, K. (2006). Empirical proxies for the consumption wealth ratio. Review of Economic Dynamics, 9, 34–51.CrossRefGoogle Scholar
  45. Skudelny, F. (2009). Euro area private consumption: is there a role for housing wealth effects? Oxford Bulletin of Economic and Statistics, 54, 257–287.Google Scholar
  46. Slacalek, J. (2006a). What drives personal consumption? The role of housing and financial wealth. DIW working paper, 647.Google Scholar
  47. Slacalek, J. (2006b). International wealth effects. Discussion Papers of DIW Berlin 596, DIW Berlin, German Institute for Economic Research.Google Scholar
  48. Slacalek, J. (2009). What drives personal consumption? The role of housing and financial wealth. ECB working paper, 1117.Google Scholar
  49. Sousa, R. M. (2009). Wealth effects on consumption. ECB working paper, 1050.Google Scholar
  50. Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61, 783–820.CrossRefGoogle Scholar
  51. Shirvani, H., & Wilbratte, B. (2000). Does consumption respond more strongly to stock market declines than to increases? International Economic Journal, 14(3), 41–49.Google Scholar
  52. Stevans, L. (2004). Aggregate consumption spending, the stock market, and asymmetric error correction. Quantitative Finance, 4, 191–198.CrossRefGoogle Scholar
  53. Whelan, K. (2008). Consumption and expected asset returns without assumptions about unobservables. Journal of Monetary Economics, 55, 1209–1221.CrossRefGoogle Scholar
  54. Zivot, E., & Andrews, D. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10(3), 251–270.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2021

Authors and Affiliations

  1. 1.University of LorraineNancyFrance
  2. 2.University of LilleLilleFrance

Personalised recommendations