Why net worth is the wrong concept for explaining consumption: evidence from Italy

John Muellbauer, Riccardo De Bonis, Danilo Liberati and Concetta Rondinelli

INET Oxford Working Papers from Institute for New Economic Thinking at the Oxford Martin School, University of Oxford

Abstract: Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the 'representative household' owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.

Keywords: financial wealth; liquid and illiquid assets; permanent income; housing wealth (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 E51 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2023-12
New Economics Papers: this item is included in nep-eec, nep-eur and nep-mac
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Working Paper: Why net worth is the wrong concept for explaining consumption: evidence from Italy (2023)
Working Paper: Why net worth is the wrong concept for explaining consumption: evidence from Italy (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:amz:wpaper:2023-27

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