Abstract
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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Allen FD, Gale D (2000) Comparing financial systems. MIT, Cambridge
Becker S, Hoffmann M (2006) Intra- and international risk-sharing in the short run and the long run. Eur Econ Rev 50:777–806
Beveridge S, Nelson CR (1981) A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. J Monet Econ 7:151–174
Campbell JY, Cochrane JH (1999) By force of habit: a consumption-based explanation of aggregate stock market behavior. J Polit Econ 107:205–251
Campbell JY, Mankiw GN (1989). Consumption, income, and interest rates: reinterpreting the time series evidence. In: Blanchard O, Fischer S (eds). NBER macroeconomics. MIT, Cambridge, pp. 185–216
Cochrane JH (1994) Permanent and transitory components of GDP and stock prices. Q J Econ 109:241–265
Cochrane JH (2001) Asset pricing. Princeton University Press, Princeton
Constantinides G, Duffie D (1996) Asset pricing with heterogeneous consumers. J Polit Econ 104:219–240
Bundesbank D (2003a) New price indices for housing in Germany. Mon Rep 5:38
Bundesbank D (2003b) Price indicators for the housing market. Mon Rep 9:45–58
Bundesbank D (2004) Ergebnisse der gesamtwirtschaftlichen Finanzierungsrechnung für Deutschland 1991 bis 2003
Fernandez-Corugedo E, Simon P, Blake A (2003) The dynamics of consumers’ expenditure: the UK consumption-ECM redux. Bank of England Working Paper 204
Fisher LA, Voss GM (2004) Consumption, wealth and expected stock returns in Australia. Econ Rec 80:359–372
Gonzalo J, Granger CW (1995) Estimation of common long-memory components in cointegrated systems. J Bus Econ Stat 13:27–35
Guo H (2001) A simple model of limited stock market participation. Federal Reserve Bank of St. Louis Review May/June 37–47
Hamburg B, Hoffmann M, Keller J (2005) Consumption, wealth and business cycles: why is Germany different? Deutsche Bundesbank Discussion paper 16/2005
Heaton J, Lucas D (2000) Portfolio choice in the presence of background risk. Econ J 110:1–26
Hoffmann M (2001) Long run recursive VAR models and QR decompositions. Econ Lett 73: 15–20
Hoffmann M (2006) Proprietary income, entrepreneurial risk and the predictability of stock returns. Cesifo Working Paper:1712
Johansen S (1995) Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press, Oxford
Johansen S, Nielsen B (1993) DisCo. Institute of Mathematical Statistics, University of Copenhagen
Lettau M, Ludvigson S (2001) Consumption, aggregate wealth and expected stock returns. J Financ 56:815–849
Lettau M, Ludvigson S (2001) Understanding rrend and cycle in asset values: Reevaluating the Wealth Effect on Consumption. Am Econ Rev 94:276–299
Ludvigson S, Steindel C (1999) How important is the stock market effect on consumtpion? FRBNY Econ Policy Rev 7:29–51
Lütkepohl H(2005) New introduction to multiple time series analysis. Springer, Berlin
Modigliani F (1971) Consumer spending and monetary policy: the linkages. Federal Reserve Bank of Boston Conference Series
Newey WK, West KD (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55:703–708
Nitschka T (2004) The U.S. consumption wealth ratio and the predictability of international stock markets: evidence from the G7. University of Dortmund, mimeo
Polkovnichenko V (2004) Limited stock market participation and the equity premium. Financ Res Lett 1:24–34
Proietti T (1997) Short-run dynamics in cointegrated systems. Oxf Bull Econ Stat 59:405–422
Rudd JB, Whelan K (2002) A note on the cointegration of consumption, income, and wealth. FEDS Working Paper 53/2002
Saikkonen P, Lütkepohl H (2000) Testing for the cointegrating rank of a VAR process with structural shifts. J Bus Econ Stat 18:451–464
Stock JH, Watson M (1988) Testing for common trends. J Am Stat Assoc 83:1097–1107
Stock JH, Watson M (1993) A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica 6:783–820
Tan A, Voss G (2003) Consumption and wealth in Australia. Econ Rec 79:39–56
Valkanov R (2003) Long-horizon regressions: theoretical results and applications. J Financ Econ 68:201–232
Vissing-Jørgenson A (2002) Limited stock market participation and the elasticity of intertemporal substitution. J Polit Econ 110:825–853
Author information
Authors and Affiliations
Corresponding author
Additional information
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.
Rights and permissions
About this article
Cite this article
Hamburg, B., Hoffmann, M. & Keller, J. Consumption, wealth and business cycles in Germany. Empirical Economics 34, 451–476 (2008). https://doi.org/10.1007/s00181-007-0130-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-007-0130-9
Keywords
- Wealth effect on consumption
- Business cycles
- Monetary policy transmission
- Financial systems
- Asset price predictability
- Permanent income hypothesis