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

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

No 1026, Economics Series Working Papers from University of Oxford, Department of Economics

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.

Date: 2023-10-31
New Economics Papers: this item is included in nep-eec and nep-fdg
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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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