Consumption,wealth and business cycles in Germany

This paper studies the long-run relationship between consumption, asset wealth and income—the consumption–wealth ratio—based on German data from 1980 to 2003. We find that departures from this long-run relationship mainly predict adjustments in income. The German consumption–wealth ratio also contains considerable forecasting power for a range of business cycle indicators, including the unemployment rate. This finding is in contrast to earlier studies for some of the Anglo-Saxon economies that have shown that the consumption–wealth ratio reverts to its long-run mean mainly through subsequent adjustments in asset prices. While the German consumption wealth ratio contains little information about future changes in German asset prices, we report that the U.S. consumption–wealth ratio has considerable forecasting power for the German stock market. One explanation of these findings is that in Germany—due to structural differences in the financial and pension systems—the share of publicly traded equity in aggregate household wealth is much smaller than in the Anglo-Saxon countries. We discuss the implications of our results for the measurement of a potential wealth effect on consumption. The views expressed in this paper are those of the authors and do not reflect the position of the Deutsche Bundesbank. We gratefully acknowledge comments and suggestions from an anonymous referee as well as from Heinz Herrmann, Helmut Lütkepohl, the editor, Baldev Raj, Burkhard Raunig, Monika Schnitzer, Harald Uhlig and Christian Upper. We also benefitted from comments by seminar participants at the ECB, the Deutsche Bundesbank, the CESifo Macro, Money and International Finance Area Conference 2005, the EEA 2005 annual congress and at the 2005 IAEA Meetings. Last but not least, we would like to thank Mark Weth for very useful information concerning the construction of the financial wealth data. Hoffmann’s work on this paper is also part of the project The International Allocation of Risk funded by Deutsche Forschungsgemeinschaft in the framework of SFB 475. Responsibility for any remaining errors and shortcomings is entirely our own.