How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption

Li-gang Liu, Laurent Pauwels and Andrew Tsang
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Li-gang Liu: Research Department, Hong Kong Monetary Authority

No 720, Working Papers from Hong Kong Monetary Authority

Abstract: This paper first investigates whether there is a cointegration relationship between Hong Kong¡¦s consumption and wealth using the latest cointegration tests that allow for structural breaks. Our tests show there is only limited empirical support for the existence of a cointegration relationship between consumption and wealth (including both housing and financial wealth). These test results thus cast doubt on the validity of the estimates based on the cointegration result. We then estimate a structural equation linking consumption and wealth derived from a habit formation consumption model. Our estimates show that the short run and the long run marginal propensities to consume out of a one Hong Kong dollar increase in total wealth are about 0.14 and 0.6 cents, respectively. These values are much smaller than those previously estimated using the cointegration approach. The housing wealth effect in Hong Kong is also relatively small compared to estimates for the United States obtained using a similar habit formation specification.

Keywords: Cointegration test with structural breaks; habit formation model; wealth effect; Hong Kong (search for similar items in EconPapers)
JEL-codes: E21 E32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2007-12
New Economics Papers: this item is included in nep-cna and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hkg:wpaper:0720

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