Wealth and Consumption in Australia |
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| Authors: | Diego May Gabriela Nodari Daniel M. Rees |
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| Affiliation: | 1. May and Nodari: Economic Analysis Department, Reserve Bank of Australia, GPO Box 3947, Sydney, NSW 2001, Australia;2. Rees: Macroeconomic Department, Bank for International Settlements. Corresponding author: Rees, email <3. daniel.rees@bis.org>4. . The authors are grateful to Tom Rosewall, Penelope Smith and Peter Tulip for helpful comments and suggestions. All remaining errors are our own. The Work has been produced with the assistance of funding provided by the Reserve Bank of Australia. However, the views expressed in this version of the work do not necessarily represent the views of the Reserve Bank of Australia. The Reserve Bank of Australia does not give any warranty nor accept any liability in relation to the contents of this work. |
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| Abstract: | We revisit the evidence on the effect of changes in household wealth on consumption using a panel of Australian states. We find that a one per cent increase in the value of housing wealth increases consumption by about 0.16 per cent in the long-run, with half of the response occurring within two quarters. The size of this response has been stable over time and largely reflects changes in spending on motor vehicles, durable goods and other discretionary items. We then run counterfactual scenarios using the Reserve Bank of Australia's macroeconometric model, MARTIN, to assess the macroeconomic effects of changes in household wealth. We show that increases in household wealth supported household spending between 2013 and 2017, when growth in disposable income was weak. |
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