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 households� financial and real wealth on consumption. The analysis makes reference to eleven OECD countries and takes into account quarterly data from 1997 to 2008. Unlike most of the previous literature on European countries, we measure financial wealth using quarterly harmonized data on households� financial assets and liabilities, which have been gleaned from the flow of funds. For comparison, we also employ national share price indices as a proxy for financial wealth. We rely on 1) standard static panel and 2) single-country level autoregressive distributed lag estimations. Furthermore, we implement a recent econometric approach that allows for more flexible assumptions in the non-stationary panel framework under consideration. Our results show that both net financial wealth and real wealth have a positive effect on consumption. Overall, the influence of net financial assets is stronger than that of real assets.