The Effects of Financial and Real Wealth on Consumption: New Evidence from OECD Countries

In this paper we present new estimates of the effect of household financial and real wealth on consumption. The analysis refers to eleven OECD countries and takes into account the years from 1997 to 2008. Unlike most of the previous literature, we exploit European quarterly harmonized data on household financial assets and liabilities, which have been taken from the flow of funds. We measure not only the effect of total financial wealth on consumption, but we also consider the impact of a subset of those financial assets (i.e., quoted shares, mutual funds, insurance technical reserves) that are more linked to the Stock Exchange. Furthermore, we implement a recent econometric approach that allows for more flexible assumptions in the non-stationary panel framework under consideration. Our main results show that both net financial and real wealth have a positive effect on consumption. Overall, the influence of net financial assets is stronger than that of real assets. Using quoted shares, mutual funds and insurance technical reserves as a measure of financial wealth, we obtain a lower estimate of the marginal propensity to consume, possibly due to the strong concentration of equity instruments in the richest households.