Consumption and disposable income in the EU countries: the role of wealth effects

We investigate the long run relationship between private consumption and disposable income for a sample of EU countries using recently developed panel cointegration techniques. For the ordinary consumption-income model the evidence on cointegration is ambiguous. In addition, the cointegration vector obtained by efficient estimation methods is not consistent with theoretical reasoning, as it reflects a decline in the savings rate over time. Extending the analysis by financial wealth improves the model fit markedly. In particular, the income elasticity is not different from 1 and therefore in line with the life cycle permanent income hypothesis. The marginal propensity to consume out of financial wealth is in a range of 3–5%, thereby confirming recent time series results.